FBLU028 Accounting and Finance

Introduction

The company, Tekna Ltd, which is in the business of laptop manufacturing is facing as issue of falling sales and budget deficits from the long time and one of the major reasons for the same is budget being prepared with appropriate rationale and mere extrapolation and adjustment of inflation. The report below throws light on what are the other problems in current budgeting system and what would be the most suitable budgets for IT manufacturing company like Tekna. It also mentions a few critical things which needs to be taken care off while making a change in the budgeting system.

Discussion and Recommendations

Issues

Amidst falling sales and profitability, if the budget is not prepared correctly then it is difficult for the management to fix the targets for salesforce, monthly sales projections and to manage the available funds. This has been because of the reason that budgets have been not been prepared for Tekna scientifically and rationally. There are several factors which have been missed out while preparation of budgets, some of which are current market status, demand and supply scenarios, the economy of country, government policies, number of competitors and their nature and market share. Since all the macro-economic as well as internal factors are not being considered in budget preparation, it becomes difficult to compare the actual with budgets (Vieira, et al., 2017).

Budgets Suitable For IT Hardware Manufacturing Company

The IT industry is a very dynamic one which depends to a large extent on the economy and the demand supply aspect of IT equipments. In case of developed or developing economy, there will be a huge demand for IT products and equipments as well as technological enhancements whereas in an economy which is underdeveloped, the demand would be comparatively lower. Secondly, the entrants of new competitors in the industry may impact the market share of Tekna and hence it is important to consider competitors strategies and growth as well (Islam, et al., 2017). Some of the significant budgets which should be in place for this company are listed below:

• Operating Budget – This is a kind of projected P&L which shows all the all the revenues and expenses and even the bifurcation of expenses into fixed and variable.
• Cash flow Budget – this shows the summary of cash inflows and outflows during the month, the opening and closing balance of cash month wise, thereby helping in identifying sources and usage of funds
• Sales budget – this gives quantitative and month wise split of sales quantity and values and helps in comparison vs previous year as well(F., et al., 2002).
• Production budget – In a manufacturing set up, this is the most critical budget as it helps in establishing what is direct labour, material and overheads requirement month wise.
• Procurement budget and labour budget – this is directly linked to production budget and helps in planning value and qty of raw materials and labour required
• Capital budget – For manufacturing company, there can be many capital enhancements
• Master budget – this captures the information of all the above budgets at one place(Ojua, August 2016)

Other Considerations

Together with analyzing the suitable budgets for an IT industry, it is important to understand what the different methodologies are by which budgets are can be prepared. They are incremental budget, activity based, value proposition and zero-based budgeting. Looking at the present scenario, it would be ideal to have a mix of zero based budgeting and value proposition based as it will help to identify what expenses are actually required to be budgeted bottom-up and what sales is expected based on value proposition (Belton, 2017).

Conclusion

From the above discussion and analysis, it is clear that Tekna needs to look at the budget preparation methodology as well as the types of budgets to be prepared. Since the company is going through degrowth, the operating budget and the cash budget becomes very critical as the company has to maintain liquidity in order to meet demands quickly and secondly it also needs to cut down on discretionary expenses, to improve profitability.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 3(1), p. 145.

F., J. G., M., L. A., P., S. A. & S., G. B., 2002. Using Budgets for Performance Evaluation: Effects of Resource Allocation and Horizontal Information Asymmetry on Budget Proposals, Budget Slack, and Performance. The Accounting Review, 77(4), pp. 847-865.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Islam, S., Fenz, S., Weippl, E. & Mouratidis, H., 2017. A risk management framework for cloud migration decision support. Journal of Risk and Financial Management, 20(2), p. 10.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Ojua, M. O., August 2016. The Importance of Budget and Budgetary Process among Non-Publicly Accountable Entities (NPAEs): A Survey of Micro Sized Firms in Nigeria. International Journal of Business and Management 4(7), pp. 305-312.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1), pp. 23-48.

Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.

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