Question

Lasertech is a start-up company that was founded by three college friends Mark, Mike, and Stella, right after they graduated from medical school. They had a vision of utilizing laser technology and selling it to hospitals and physicians to enable less-invasive surgeries. The company has been struggling in recent years. Sales have fluctuated and the company is often left with unsold inventory of products. Mark prepares monthly production schedules based on sales of the previous two months. The production schedule triggers the purchase of inventory. Stella monitors sales and inventory levels and plans promotions to sell slow-moving inventory. Mike monitors the cash flow and borrows against a line of credit when cash is low. The company founders brought in a consultant to assist the company in increasing sales, lowering costs, and controlling inventory. The consultant recommended implementing a formal budgeting process as the first step in improving performance.

Required:

1. Describe the role budgeting plays in strategic planning.
2. Describe the role budgeting plays in defining short-term objectives.
3. Identify and explain four characteristics of a successful budgeting process.
4. Explain how the budgeting process might be able to facilitate communication among the manufacturing, marketing, and finance units of the company.
5. Define flexible budgeting and explain how it is used.
6. Identify two types of budgeting that companies use other than flexible budgeting.

Answer 1

A ) Role of budget in Strategic Planning.

The equitable allocation of all resources available to promote the smooth working of all departments in the harmonious manner is known as budgeting.

Budgeting is the strongest part of financial management.

It plays a vital role in the strategic planning of a company which ensures appropriate financial and operational activities to be performed efficiently in order to increase profits. As financial management has substancial significance,Bussiness owners are advised to hire fianancial experts who can deal with numerous contemporary budgeting techniques,book keeping is the most trusted which allows the tracking of all transactions a company has made or plans to make.

Strategic planning is the key component of a Bussiness success.All targets to be achieved and guidelines to attain them are planned under the flagship of strategic planning,hence it is to be planned in an intellectual way.

B) Role of budget in short term objectives:

The professional objective of a given company often are classified as the goals of the bussiness.Objectives can be long term and short term and appear unrealistic at the time of creation. However , a company's objectives often depend on various factors including the company's workforce,available resource and budget.

Short term objectives are those goals that can be reached within a shorter period, whether it is within a month or less than five years.short term objectives include paying off startup company loans,establishing a website,market existing products and hiring employees.most objectives related to growing or expanding a Bussiness are related to the budget,whether the objectives involve available funds or saving additional funds in the operation budget.

C) characteristics of successful budeting process :

1. Budget must Address the Enterprise's Goals

Essentially, a budget must begin with the Enterprise's short and long term plans and goals. The budget should not just to recreate the enterprise previous years with slight changes.It must include valuable input from planning so that the budget becomes a powerful guiding tool.when the budget addresses an enterprises goals and objectives clearly, it is bound to be successful.

2. The Budget must be a Motivating tool.

The budget should motivate and inspire all the people in the enterprise to work towards attaining the enterprise goals. Furthermore, the budget must encourage everyone to work together for the improvement of the organisation.the budget should not be viewed as a rigid plan, or as a device for top management to use in assessing blame.

Most often the budget is successgul when managers and employees of an enterprise view the budget as an essential tool to enhance their overall performance.

3. Budget must have the support of management.

The budget must undeniably have the support of managemment at all levels of the organisation the support of both at the top level and lower level managers is crucial to garner the support of the employees of the enterprise. Hence to be successful it is crucial for the budget to have the support of management at entry level within the organisation.

4. The budget must convey the sense of ownership:

To be successful the budget must convey a sense of ownership to the people in the enterprise who are given the responsibility of implementing the budget.the budget should not be imposed on them. Rather, the people responsible for its implementation, must have necessary input into the budgets development.

D ) Budget helps in coordination among various Departments in organisation :

A budget is quantitative plan of action that aids in coordination and implementation. The budget communication objective to all the departments with in the company.the budget presents top management with coordinated and summerizes data as to financial ramification of plans and actions of various departments and units within the company.

Budgets usually are established for all departments and major segments in the company. The budgwt must be comprehensive,including all interrelated departments.

Coordination involves obtaiming and organizing the needed personnel, equipment and material to carryout the bussiness. A budget aims in coordination between seperate activity units to ensure that all parts of the company are in balance with each other and know how they fit in.it discloses weakness in the organisational structure.

The interdependencies between departments and activities must be considered in the budget.

E ) Flexible budget : Flexible budget is a budget that is mostly used as a static budget and basically changes with the changes occurring in the volume or activity held in production, also helpful for increasing the managers efficiemcy and effectiveness because it is set to benchmark for the actual performance of the company.

It is used for both planning purposes and control purposes and is generally used to estimate factory Costa and operating costs. A flexible budget is much more realistic than fixed budgets.

Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalised. Under this approach managers gives their approvals for all fixed expenses, as well as variable expenses as a proportion of revenue or other activity measures.

F ) Types of Budgets other than flexible budget:

Master budget :

Most companies will start with a master budget, which is a projection for the overall company. Master budgets typically forecast the entire fiscal year. The master budget will include projections for items on income statemwnt, the balancesheet and the cashflow statement. These projections can include revenue,expenses, operating costs, sales and capital expenditure.

Operating budget:

The operating budget includes the expenses and revenue generated from the day to day Bussiness operations of the company. The operating budget focusses on the operating expenses including cost of goods sold and the revenue or income.COGs is the cost of direct labour and direct material that are tied to production.

The operating budget also represents the overhead and administrative costs directly tied to producing the goods and services. However,the operating budget wouldn't include items such as capital expenditure and long term debt.