Sound Business Based on Sound Finances Podosave Essay

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Sound Business Based on Sound Finances

Podosave Ltd. is a food retail organization for which I will present a financial analysis based on the information I gained and the knowledge I acquired as a result of my role within the business.

My Role

My role was to work within the business, recruiting for vacant positions and training existing employees in order that they were able to attain relevant skills for their roles. Reporting to Head Office, I would relay information that was relevant to the HR department and act on the department's behalf.

The role of financial management in business

Financial management is fundamental to the success of a business and the strength of its financial 'health'. Those who work in managing a firm's finances should be able to identify its strengths and weaknesses whilst locating opportunities for growth. A key component of this is to compare financial statements against one another to look for variations and consider what the reasons for these variances are. Looking for differences in budgetary allowances is also crucial if those who work in financial management are to plan for the future effectively and mitigate potential risk.

Financial management must incorporate the implementation and development of financial control systems and the collation of data relevant to a firm's finances. The analysis of financial reports in order to glean information relevant to strategic decision making is also a central feature of managing finances.

There are various elements of financial management. Bookkeeping and financial control entails the stringent recording of company expenditures and receipts, whilst making sure that they are in line with standard guidelines and procedures. Managing the budget so that planned expenses do not exceed the agreed funds is also a key component of financial management, as is the management of actual cash payments both received and paid, which involves the analysis of previous forecasts and projections. The collection of payments owed, the analysis of financial reports and the analysis of budgets to identify where departments have overspent or over-forecast are also significant elements of managing finances. Preparing the funds to make large purchases and of course, managing the business's profit and loss statements are both important aspects of this role.

The role of financial planning

Planning what finances a business needs to be able to afford the purchases they need to make or strategic changes they need to fund is about careful financial planning. Planning finances is about being able to analyse previous financial statements and departmental budget reports and identify what resources are available and what financial tools can be used in order to achieve a business' financial goals. Essentially, the financial aims of a business cannot be achieved without finances and tools with which to raise finances.

Looking at the financial history of a firm and looking at the current environment have a part to play in financial planning. Considering what revenue generating resources are available and what revenue saving methods can be taken advantage of is also important. Looking at the various operations that exist and developing strategies are fundamental to planning a firm's finances. Financial control is about managing the firm's existing finances as closely as possible by controlling budgets and expenditures but also by ensuring that what is charged and spent is fair. Making sure that payments that are owed are paid in full and on time is also part of this role.

Budgeting

A budget is created for every department of a business and for the business as a whole in order to control what is spent and ensure that a profit will still be made. The document can allow for future planning, to forecast what will be earned and what will be spent and can be created so that a business can assess whether they are able to progress with what they currently make and spend. The budget must take into consideration the overall revenue and the business' outgoings, what the business makes in terms of income, and what their net profit or loss may be.

There are varying styles of budgets however. Top down budgeting occurs at the highest level and feeds down into the other tiers of the operation and dictates their own budgets. For bottom up budgeting, the converse is true, as the lower tiers of the organization prepare their financial plans and pass them up to the most senior level so that an overall business plan can be created.

There are advantages and disadvantages for both and the style that is adopted will depend very much upon the type of business involved.

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For instance, a top down approach may demotivate lower management who feel that their budgets are tighter than is necessary, especially if they feel that other departments have been given larger budgets that provide more financial freedom. That said, this style is based on the logical assumption that every department at all levels can only have what is available from the resources that exist, based on their actual needs. A bottom up approach is based on what each department assesses as necessary for their needs, but may involve requests for money that is not actually needed in order that the department has greater financial freedom without the worry of exceeding their budgetary limitations. This style can therefore lead to money being wasted on unnecessary projects, for example.

Budgets can be prepared incrementally so that a percentage is added based on the previous budget. This allows for consistent management but could go out of date and become irrelevant. Zero-based budgeting in essence provides no budget at all at the outset of the financial period. Funding is allocated in accordance with achievements but this presents difficulties in that a task may require financing at the outset rather than on completion. It is also difficult to prioritise various projects if budgeting is done in this way. Activity-based budgeting creates budgets based on the cost of an activity and may involve target setting. This approach does allow for increased accuracy in estimating the cost of a product and a better overall conceptualisation of the overheads involved in different activities but is not time effective because of the amount of time involved in collecting the information needed to set the budget. The traditional-historic approach in budget setting is based on previous financial reports. This involves an incremental provision of funds based on when they are needed and the demonstration of potential cost benefits. Again though, this approach is rather time consuming.

Podosave -- Budgeting approaches

In the case of the organization studied in this assignment, budgeting was done based on activity. Activity-Based costing was originally conceived as a means of controlling rapidly growing overhead budget costs and is a logical extension of the switch to departmental rates. Labor costs go down and overhead budget rates rise rapidly as a company automates. A few high priced technicians (overhead budget) replace many low priced assemblers (direct labor). Support costs (overhead budget) go up as companies strive to reduce inventories, improve quality, etc. Different products consume different levels of these support costs. Support costs, which have traditionally been considered fixed, are really step variable costs that fluctuate with a variety of different activities. In an activity-based system, costs are collected by activity rather than being work centred. The number of times the activity occurs is estimated and an overhead budget rate is calculated for each selected activity. The number of times the activity occurs for each product is counted and the overhead budget is applied on that basis.

Activity-based costing (ABC) is a costing system that assigns costs based on how work is carried out in an organization and is based on the need to continuously provide incentives for improvements. Using the value chain to follow the flow of activities and costs provides a useful foundation by which costs can be identified, classified, and traced. Typically, the value chain is a set of linked processes that flow in a logical sequence. It is useful, in an ABC system to split these processes into two categories -- production processes and business processes. Production processes include all of the activities that occur in order to manufacture a product, to obtain merchandise, or to provide services for customers. Business processes are those activities that initiate production activity and allow the proper delivery of a product to customers.

One very useful way to assess the need for resources and evaluate the use of resources is to categorize them based on hierarchies. There are five resource hierarchies.

Unit-level resources are acquired and used for specific individual units of a product or service. For instance, the raw materials used to make a table can be traced directly to that table.

Batch-level resources are acquired and used to make a group (or batch) of similar products. For instance the use of outsourced supervision to complete a batch of products to meet a deadline is a cost directly traceable to that batch. The costs are indirect to each individual unit of product but are directly….....

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