This report aims to evaluate and analyze the existing operational system of Superices Ltd. The advantages and disadvantages of employing a budget plan and budgetary control system was discussed in this report for the management to be aware of the importance of budget planning. Budgeting is an essential tool for the management in achieving company’s goal of maximizing revenue and minimizing costs.
Through the use of a budget plan, actual revenue and costs can be compared to determine the efficiency of the operation and effectiveness of the existing policies. Also, specifically discussed are the remedies on how to avoid production and financial difficulties of the company as previously experience by Superices.
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The report also tackle the management of working capital (refers to excess of current assets over current liabilities) particularly cash, receivable, and inventory management. In as much as working capital is the difference between current assets and current liabilities, working capital requirement may be minimized in cash management, in making collections and in production processes, by effective credit and collection policies, reduction of time lag between completion and shipment of finished goods, and favorable terms from suppliers.
Also included under cash management are the strategies of managing cash such as accelerating collection of receivables, stretching payables, and accelerating turnover inventory. In receivable management, suggestion was made to avoid the risk from uncollectible accounts. Lastly, in inventory management, a recommendation regarding purchase and delivery of stocks was given to minimize costs related to inventories.
Superices Limited must have a plan to guide future operations. The preparation of a budget plan must be employed to serve as a basis for comparison and facilitates the control process. Budgeting and budgetary control system are both essential in attaining the company’s goal of maximizing profit. Some of the more significant advantages of budgeting and budgetary control are the following :
- Budgeting helps various members of management aware of the problem faced by others and the factors that interlock in running a business organization ( Maher 2001). It promotes coordination and communication.
- With a budget, all people in the organization become conscious of the need to conserve business resources (Beerman 1978).
- Efficient or inefficient use of resources is revealed by budgets intended for that purpose (Welsch 1988). A flexible budget for instance can be prepared to determine the amount of output that should be produced in a given number of hours of operation.
- Compels management to think about the future. Forces management to look ahead, to set out detailed plans for achieving the targets for each unit to anticipate and give the organization purpose and direction.
- A budget gives management a means of self evaluation and can be use to measure progress (Albrecht &. Stice 2001). The shop, for example, has a budget for the unit which includes only revenue and costs that are subject to the manager’s control. Actual data from operations are then accumulated, and a comparison with the budget shows whether or not the unit achieved what was expected.
On the other hand, budget preparation and budgetary control may have disadvantages particularly in perception terms because it evokes negative emotions. A budget imposes restraint and hence, is not favorably received by many individuals (Proctor 2002). But the negative aspects of budgeting may be minimized, if not eliminated entirely, by an enlightened management.
To avoid production difficulties, proper budget planning is essential. In budgeting, all functions and activities of the business are carefully interlocked. In case of Superices Ltd., the plans for the production division must be tied in with the plans for the sales division. If large shipments are to be made to customer during summer months, the production department should have the finished product ready at that time. At a still earlier date, the materials to be used in production have to be ordered, allowing enough time for their receipt from suppliers and their conversion into finished products.
Through the use of a cash budget, Superices Ltd, could not experience financial difficulties because with this kind of budget, it is possible to anticipate future cash flows of the company. In cash budgeting, payments are scheduled at convenient times, that is, when cash balances are expected to be sufficiently high (Horngren, Sundem and Stratton 2005). If the outflow of cash is too great, plans have to be made to borrow funds and in months when receipts are greater than disbursements, loan can be repaid and cash balances can be built up.
Management of Working Capital
- Cash Management
Cash is the most liquid of all current asset items and is used to meet financial requirements so that its flow must be carefully planned and controlled. The following are the basic strategies in managing cash:
- Collection of Receivable must be done as quickly as possible without resorting to high-pressure collection techniques ( Brown 1982). One way of reducing operating cash requirements is by speeding up or accelerating collection of receivables. This may be effected by shortening credit terms and offering special discounts to customer who settle their accounts within a specified period.
- Stretch accounts payable. Pay bills as late as possible without adversely affecting credit rating (Melaney 2003 ). Superices must look for suppliers who can give a longer credit terms to the company in order to reduce cash requirement.
- Turn over inventory as quickly as possible (or even go to the extent of eliminating inventories). Another way of minimizing cash requirement is by accelerating inventory turnover (Kimmel, Weygandt and Kieso 2003). This may be effected by reducing inventory level in proportion to sales volume. Stock check must be done regularly, if possible, on a daily basis .Deliveries of perishable ingredients must also be done daily to avoid wastage.
1. Receivable Management
Plans and policies related to sales on account must be formulated and administered to ensure the maintenance of receivables at a predetermined level and their collectivity as planned.
A high level of receivables exposes a company to greater risk from uncollectible accounts, more financing charges and greater opportunity cost arising from the capital tied up in receivables (Sutherland 2004). In case of Superices Ltd., the company must intensify collection of overdue accounts from the two restaurants. The company must impose interest charges for every overdue accounts and offer trade discounts to customers who are paying promptly.
- Inventory Management
Formulation and administration of plans and policies is necessary to the company to efficiently and satisfactorily meet production requirements and minimize costs relative to inventories (Hilton 1996) .
The size of inventory is related to size and frequency of purchase orders. When purchases are made less often but in bigger volumes, inventory must be at a higher level so that less ordering costs but more handling costs are incurred. When purchases are made more often and in smaller volumes, inventory must be at a lower level thereby giving rise to more ordering costs but less handling costs. In the case of Superices Ltd, the company can implement both options depending on the stocks to be delivered. For example, perishable ingredients must be delivered on a daily basis while the others can be delivered on a weekly basis to avoid wastage which is an additional costs for the company.
CONCLUSION AND RECOMMENDATION
Base on the analysis of Superices’ operation, it was find out that the company lacks proper planning and control which is a significant management function. In any enterprise, plans must be made to guide future operation. Control over the working capital is weak.
Preparation of a budget plan and implementation of budgetary control is strongly recommended. Plans, of course are not enough, there must be a follow-through to check if they are being carried out as intended. The use of a control budget is more suitable for control purposes. In this type of budget, revenue and costs are not allocated but are identified directly with the responsible individual.
Policies related to utilization of working capital must be made to attain predetermined objectives of an organization relative to profitability of operations, liquidity of financial resources, and minimization of risks and company costs. The company must have a standard operating procedures regarding collection of receivables, ( like the penalties to be imposed to customer in case of late payments and etc.) payment of obligations and disposal of finished products.
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