As the new managing director of I Can Business Corporate (ICBC), I have been bestowed with the responsibility to establish policies and systems for this business. The first one I choose to work on is the financial reporting system.
ICBC, like other firms, is an organization with various departments, some of which are interdependent while others not, but are linked together by the Accounting and Finance department. The aspects of financial and accounting of every department are recorded and reported to different stakeholders through financial reporting. This makes financial reporting an essential part of corporate governance, and therefore, it is a very critical and essential task of an organization like ICBC because it assists in making financial decisions as well as other resources.
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On this background, Haslam and Chow (2016) define financial reporting system as the process which involves capturing, summarizing and disclosing of the financial information to different stakeholders about the financial position and financial performance of a business over a stated period of time. The stakeholders may include investors, government, lending agencies, creditors, government agencies, and investors. The reporting may be done annually or quarterly. As such, financial reporting is normally considered as accounting end product; thus, its components include the financial statements such as cash flow statements, profit and loss account, balance sheet, and changes in stock holder’s equity statements. It also entails financial statement notes, quarterly and annual reports in the case of listed companies, management discussion, and analysis (for public companies), and prospectus (Haslam & Chow, 2016).
Budget Cycle and Process
According to Lohrey (2017), a budget cycle refers the life of a budget from the time it is created until the time it is evaluated. It usually begins with planning and ends with an in-depth evaluation. As such, it entails four main phases/process; preparation, approval, execution, and auditing and assessment.
Preparation phase: this phase consumes a lot of time normally from three months to six months. During this stage, the department managers make plans, crunch number, prioritize spending, and make a preliminary budget plan and submit it for approval. Since most organizations prepare distinct budgets for every department then combine later, preparation phase may repeat itself before creating a preliminary budget capable of passing through approval stage.
Budget approval phase: the length and formality of budget approval will depend on the size of the organization, but approving a budget makes it official. It usually requires a consensus vote, and much discussion in case of a large business like ICBC before this stage is completed.
Execution phase: this is the stage where a budget is implemented, and it normally runs from the beginning to the end of fiscal year. It requires regular and consistent monitoring to ensure departments are following constraints of the budgetary and to uphold internal controls. If there is need to make adjustments during the year, then part of the annual budget may go back to the preparation stage and repeat the same cycle. If any discrepancies are covered during monitoring such as major cost overruns, an internal audit may be conducted.
Auditing and evaluation: this consists of either external or internal auditing or both, and is done at the fiscal year-end. It entails a thorough examination of the end of year financial statements and reports, which gives the way to assess the compliance with the budgetary restraints and to determine the accuracy of budget projections. The evaluation reports which the audit team creates includes the coming year recommendations, completes both the audit stage and the yearly budget cycle (Lohrey, 2017).
Operating Budget versus Activity-based Budget
The management of ICBC should use an activity-based budget (ABB) instead of an operating budget. Activity-based budget starts with the managers defining the output then determining the required resource allocation to produce the output based on certain cost drivers; thus, budgets are prepared after investigating and justifying cost drivers. On the contrary, when using operating budgets, the managers simply forecast sales of the next period based on previous/historical figures, then the budget is (Căpuşneanu, Boca, Barbu, Letiția-Maria & Topor, 2013).
This makes ABB more superior to operating budget because it provides the management with the accurate costing of products and services, to make better buy or make decisions as well as deciding whether a product should be discontinued or not. Thus, offering ICBC management with an advantage of investing its money where it most needed, hence, the chances for success for each business activity funded (Shane, 2015).
Also, using an ABB will enable managers to create a connection between costs and workloads, and use it to uncover hidden costs and wastes; hence they can assess the full organization’s efficiency. Besides, ABB allows the integration of budgets with other initiatives for management (Shane, 2015).
Similarities and Differences between Operating and Activity-based Budgets
Both operating and activity-based budgets are similar in that; both are methods use to allocate various business product costs. Also, both of the methods measure overhead costs, then attach them to products depending on particular cost drivers (Căpuşneanu, Boca, Barbu, Letiția-Maria & Topor, 2013).
However, they also differ in certain ways. First, ABB focus on the volume of work and the processes costs, while operating budgets focus on departmental and workers costs. Additionally, ABB determines, identify and measure the effects of capacities unused, while operating budgets only measures the effect but do not identify and determine the unused capacities. Also, ABB ensures management with transformation possibilities of the thinking of the organization concerning fixed costs. On the contrary, operating budgets are based upon the negotiation process between responsibility centers managers and the senior management (Căpuşneanu, Boca, Barbu, Letiția-Maria & Topor, 2013).
An Example of Budget Guidelines that ICBI should Follow to Successfully Plan
To successfully plan, ICBC should follow the following guidelines bearing in mind the type of budget proposed for use. These guidelines include:
Analyze the expenses and should think of cutting unnecessary costs- should ensure that most of the costs included are controllable, engage employees to develop strategies of cutting costs, and should avoid unnecessary expenses in times of liquidity crisis.
Assess the business potential- through analysis and comparison of budgeted and actual performance periodically. In case deviations are discovered, the cause should be identified, and corrective actions are taken.
The budget should be aligned with the company’s practices and standards. Also, the budget should be shared with the employees, and they should be made accountable for achieving the targets for the budgets. A reward should be introduced to motivate them to achieve the targets.
Five Basic Budget Guidelines
The five most basic guidelines according to Roberge (2014) includes, first, analysis of the financial status. This can be done through examining with accuracy, the financial records including sales and revenues of a company or financial sources and predictions of revenues to be made if it is a new company. The analyzed sales and revenue figures estimates are the cornerstone for budgets. Secondly, analysis of the total expenses and costs to be incurred to earn the estimated revenues. These costs include variable, semi-variable and fixed costs.
Thirdly, analysis of the profits estimates to be made from the investment. This can be done by subtracting the estimated costs from revenues.
Fourth, allocating some extra resources for making adjustments in case of deviation from the estimates. Then finally, blending the desires and logic of the business with above estimates, and make an actual budget by making necessary adjustments to the above estimates (Roberge, 2014).
References
Căpuşneanu, S., Boca, I. S. R., Barbu, C. M., Letiția-Maria, R. O. F., & Topor, D. (2013). Implementation of Activity-Based Budgeting method in the economic entities from mining industry of Romania.
Haslam, J., & Chow, D. (2016). Financial reporting. University of London, London.
Lohrey, J. (2017). Four Phases of the Budget Cycle . bizfluent. Retrieved March 16, 2018 from https://bizfluent.com/facts-7618606-four-phases-budget-cycle.html
Roberge, M (2014). Guidelines for building a business budget. Retrieved March 15, 2018 from https://www.slcbookkeeping.com/blog/bid/208098/Guidelines-for-Building-a-Small-Business-Budget
Shane, J. M. (2015). Activity-based budgeting: creating a nexus between workload and costs. FBI L. Enforcement Bull. , 74 , 11.
