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The Needs for Budgets and Strategic Planning - Case Study Example

7 pages
1848 words
Harvey Mudd College
Type of paper: 
Case study
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Executive Summary (250 words)

The purpose of this report is to help the company engage in several income generating, cost saving, and practical strategies meant to help it improve its financial performance. The scope of the report will encompass budgeting and strategic planning which will form a basis for prudent decision making for the company. Among the many issues, that the company faces include a budget that is not functioning efficiently and the company does not employ a strategic planning process. For the last ten years, the company has been undergoing financial difficulties that have seen it survive under its parent company to the point that it has a debt of 10,039,000.

Another problem that the company faces is whether to conduct in-house manufacturing or outsource manufacturing of its new rugby boot product line. The company is considering purchasing two new equipment aimed at helping it save costs and make the production process more efficient. However, the objective faces a problem where it lacks investment capital and thus will have to settle on purchasing one machine.

The paper concludes by emphasizing that a budget and strategic planning is essential for business since they serve as a guide in strategy implementation by systematically playing different roles. It recommends that the company engages in outsourced manufacturing for the new rugby boot product line since ideally, its risk appetite should be low given its dismal financial performance. It also suggests that the company initially purchases the Gluemaster machine due to its payback period and rate of return.

The Needs for Budgets and Strategic Planning (274 words)

According to Raghunandan, Ramgulam and Raghunandan-Mohammed (2012, p. 111), a budget is a quantitative analysis that is prepared before a defined period and consists of a policy that is to be pursued against a given set of objectives. Primarily, the process of budgeting involves setting goals, creating forecasts for aspects such as revenues, costs, cash flows and production quantities among other factors thus forming a strategy. Hence, by putting together a strategy, finance departments of a company can be able to discern which investments should be made and how they can be financed.

Raghunandan, Ramgulam, and Raghunandan-Mohammed (2012, p. 111), further state that budgets are beneficial for businesses since they serve as a guide in strategy implementation by systematically playing different roles. These useful systematic goals include communication and coordination, quantification and cost awareness, control and evaluation, methodical planning and motivation. Furthermore, businesses benefit from the use of and the development of a budget by being able to promote the efficient use of resources as well as providing support for critical functions.

However, there exists a problem with budgeting, which emanates from behavioral aspects. In cases where there are dysfunctional behaviors, pressures are often developed which in turn leads to mistrust, hostile tendencies and injurious actions to the long-term prospects of a company. An example of a dysfunctional behavior can be manifested in information hoarding which may have adverse implications for strategy and decision-making processes. Therefore, every budgeting process should be conducted in a way that provides the necessary motivation to persons in the organization to make their maximum contribution to the budgeting process (Raghunandan, Ramgulam & Raghunandan-Mohammed 2012, p. 116).

Break-even Analysis of the Proposed New Rugby Boot

Different Types of Cost Behavior (95 words)

According to Albrecht (2014, p. 59), variable cost is the total amount that is spent in direct proportion to the volume of activity measured in sales and production while fixed expenses do not vary on the size of business. Mixed costs have elements of both fixed and variable costs. Stepped fixed costs are those that do not change when they are within high or low threshold activity but change only when the threshold is breached. In reality, all fixed costs are step fixed costs since they are both not dependent on activity incline or decline.

Risk and Return Offered by the Two Manufacturing Options about Operating Gearing (209 words)

According to Steven (2006, p. 43), operating gearing is a measure of businesses fixed and variable costs as a percentage or ratio of its total costs. Steven (2006, p. 43), further shares that when a company manufactures and sales its goods, it will have a high level of fixed cost hence a high proportion of fixed costs. On the other hand, a business that outsources its products for sale has a low level of fixed expense, therefore, a small percentage of fixed costs.

Businesses whose managers have a high-risk appetite prefer manufacturing their products for sale since they will have a high level of return on the sales and exceed the breakeven point. However since solely producing one's products has equally possesses a high level of profit in the event that the sales do not exceed the breakeven point, managers who have a low-risk appetite will prefer outsourcing their manufacturing processes (Steven 2006, p. 44).

The occurrence, therefore, means that Pooma Sports Limited risks against loss are lowered when it uses outsourced manufacture instead of in-house manufacture. Given that the company's financial health for the last seven years is discouraging it should engage in a strategy that predisposes it to reduced risk which is outsourced manufacturing.

Reasons for the Differences between the Net Cash Flows and Operating Profit (325 words)

The idea as to why cash flows remain negative while the company returns to profit maybe attributed to timing (Collins, Hribar & Tian 2014, p. 188). The company's cash budget subscribes to two policies that impact its cash flow. The policy dictates that credit customers are allowed on month credit on sales, and credit suppliers allow one-month credit on raw materials. The system, therefore, means that there may not be a real-time cash transfer between clients and suppliers. Therefore, by allowing customers to take goods on credit implies that the business will not have the necessary cash to pay suppliers thus necessitating that it uses its cash balances.

Another reason that may be attributed to the negative cash flow while the company returns into profit is the changes in seasonal demand. The negative cash flow may arise from the reduced volume of cash paid into the business while the business continues paying fixed costs. For this case, the fixed cost may be more significant than the companys actual sales. Similarly, the negative cash flow may be attributed to holding excessive stock. When a firm is carrying too much inventory which has not yet been converted into sales it risks the catalog becoming obsolete and eventually unmarketable hence cannot be turned into sales (Collins, Hribar & Tian 2014, p. 188).

Another reason that there is a difference between net cash flow and operating profit is that the two are instruments of financial measurement but are not necessarily linked. Ideally, operating profit measures a companys sustainability while cash flows measure the companys ability to pay bills when they are due. In essence, the cash flow is a measure of the closing balance after the deduction of cash paid out from those that are received while profit is the remainder of the deduction of expenses from revenues. Hence the difference between the two can be accounted by the fact that cash flows are cash that is exchanged while operating profits is a deduction of expenses from revenues hence there is no directly proportional correlation.

A Discussion on the Original and Proposed Cost Cutting Methods

A Critical Appraisal of the Reason for Apportionment (275 words)

One of the reasons for the apportionment is that it has the ability to provide accurate costs. When costs are allocated to respective departments, the budget will be able to demonstrate that the item which is associated with the cost had an input in the generation of the charges. Ideally, one can be able to identify the number of resources spent on a specific area within a firm. Also when there is accurate product cost information, the quality of financial reporting will be enhanced. Similarly, the quality of decision-making will also be enhanced.

Another reason for the apportionment is that it is useful in enhancing resource usage. When costs are assigned to specific departments, the costs may be used only to a point where their benefits surpass their costs. For instance, when contemplating on using a particular resource of a unit, an individual may first consider a departments variable and fixed costs. Hence, one can estimate the use of variable expenses by linking it in accordance with levels of sales, transit charges, cost of sold units and commissions.

The last reason for apportionment maybe the ability to control limited budgets. Allotment helps a company know how to use its resources by making it clear that there are costs which as associated with the funds. If the resources were obtained at no cost, the demand for them would be more significant than if there was a cost assigned to them.

A Critical Appraisal of the Sales Directors View (180 words)

The purpose of overhead cost absorption is to assign indirect costs to cost objects. Overhead cost absorption allocates costs that cannot be able to be attached to an activity or product since it is not traceable. When overhead cost absorption is used, a company can charge overheads for individual products and jobs. Overheads may be allotted to particular departments. In some cases, the overheads are placed over the units that are produced. The process enables the consolidation of costs such that when a cost unit goes through a number of centers, the overhead that is absorbed is apportioned to each center.

The process may encompass two principles, which are the administrative and manufacturing overhead. Administrative overheads include the costs such as running front offices while manufacturing overheads are the indirect costs that a factory incurs. The Sales Directors proposal will have the impact of reducing the overheads that are chargeable on the sports equipment and the sports clothing earnings. It will, therefore, help the company increase sales after price reductions and maintain or increase profits in the long run.

An Appraisal of the Results of the Capital Investment Appraisal of Gluemaster and Superstitcher

A Discussion of Reasons for the Apparent Conflict between the Investment Advice (384 words)

The company has two options for operational development where one encompasses automating production processes using Superstitcher and improving production processes as well as product quality by using Gluemaster.

The use of Superstitcher will be beneficial since it provides the company with a positive net present value of 158, 844. Ideally, when a project has a positive net present value, it implies that the projected earnings by the project will exceed its costs (Vernimmen et al. 2017, p. 269). It will, therefore, be profitable. Similarly, the use of the Gluemaster will be beneficial since it also has a positive net present value of 140, 775. It also implies that the costs of the project will be less than the earnings thus making it profitable. However, compared to Gluemaster, Superstitcher will be more profitable since it has a greater positive value which implies greater earnings.

Despite having a promising net present value, it is unfortunate that Superstitchers payback period is four years and five months which is in great contrast to Gluemaster which is three years and 12 months. Given that the end of life for the machines is...

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