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One of the first things we must address is what constitutes a budget. A budget is an outlined and organized plan that displays how assets (cash, material, & other resources) are obtained, and utilized over a specified amount of time. It is a financial outline that is formulated to help with the projection of additional future income as well as current expenses. It can do things like outline potential outcomes of future acquisition, refine existing projects based on purchased amounts, or show you weekly, monthly, or annual expenses.

In fact, the entire point of having a budget is to allow for a company to accurately estimate its costs so that it can control its financial stability within reason, as well as enhance its fiscal accuracy, and offer a better guide for managerial direction! In fact, that is one of the primary roles of a manager; to apply the budget to ensure a smooth usage of financial or physical resources in operations.

That said, it is important to raise the specter of concern on several notable issue with our companies budgetary planning. For starters, let’s examine our sales budget forecasts. It’s a projection of our sales for Year 9. It states: Units Expected to be Sold as 3,510. If we are to take this as an assumption of units for next year, it is a dangerous one. Year 8 had a 15% reduction in units that were sold compared to Year 7. Presently, there is an economic recession in North America, and this is being forecast for the next several years. Insofar as I am concerned, this recession is not being taken into account in this sales projection. Certainly it is not reflected from our Net Sales, which have shown a noticeable decrease from Year 7 to Year 8.

Another concern is within the Budget Schedule and ProForma. There is not any quarterly breakdown for us to more accurately forecast for a Master Plan. In addition, there isn’t a section for us to take seasonal inventory purchases and material in. It does not address the fact that cycling is almost exclusively an outdoor sporting event, with winter month competitions virtually nonexistent. A possible solution would be to note these seasonal trends by having increased inventory stores ranging through Spring to Autumn with reduction to low levels across the winter months. If we were able to have this information presentable in a 4-Quarter fashion, it would almost certainly allow for Competition Bikes, Inc. to properly and more accurately project reasonable future sales.

Also, another concern is that at present, our company does not presently display how to specify our uncollected or uncollectable receivable goods. In a time of increasing economic uncertainty and downturn, it is very possible that we may have an inordinate number of uncollected bills, in turn, affecting our bottom line. If we incorporated this display into our budgets, we should be able to more quickly and accurately identify problematic customers, or areas within our projections that may raise concerns; and deal with them promptly.

Also of concern is that there is that for our company, that is not so easily identifiable, is within the Raw Materials Budget. It’s instantly obvious that there are two of them, and this can lead to quick confusion, because they’re supposed to be in the same category. I therefore will issue the recommendation that since they’re both in the same budget, that they both be merged into a single budget. There is no need for a separate Frame Materials section, when it can nicely be incorporated into the Components section, and perhaps the pair can be renamed overall.

Yet another concern for the company is our level of noted inventory. Competition Bikes, Inc. develops and builds its bicycles upon the completion of a sale. That said; our company is also considering an Ending Inventory in the Budget of 140 bicycles, unproduced. This comes out to 140 sets of parts, along with 5,880 carbon fiber strips.

Ultimately, this would be financially distressing for us because any leftover or unproduced units can easily depreciate in value. Our suppliers are constantly refining their materials and techniques to improve quality. Leftover products can not only waste space, but they can devalue and cause more loss.

None of this is reflected in our process for inventory, and this should raise a considerable concern for the company and it needs to be indoctrinated into our budget and planning going forward.

Regarding what is known as a Flexible Budget, this is a system that allows a company to measure on the volume of activity and not on a fixed amount. The figures that are presented within a Flexible Budget are based on the tangible yield of goods. There is also an aspect known as a Variance. A Variance is the variance between a planned, intended or normal sum and the actual total earned or sold. A Variance can be figured for not just the expenses but also the returns. You also have two specific types of Variance, Favorable and Unfavorable. Favorable is when you get results that surpass the budget. Unfavorable is when you do not.

The results will most likely differ from your primary, or master budget, and this is most likely going to be due to the company’s sales not being the same as those that are forecasted, or because the fixed costs were not what was expected, or because the CU (Cost per Unit) wasn’t correct. Price Variance (PV) is preferred, because its formula is the actual price minus the standard price. Quantity Variance (QV) would be preferred, because its formula is the actual amount that was used minus the actual standard amount that was given or allowed.

CBI’s Favorable Variance and CBI’s Unfavorable Variances

Regarding Competition Bikes, Inc., The Net Sales marker indicates 5,247,450 with an actual output 5,096,847. This is an Unfavorable Variance. This is our generated amount of sales, which is shoddier than what our planned performance should be. On our Performance Report, Favorable and Unfavorable are subsequently identifiable by a capital U or F, near the totals under the Variance Columns.

With an Unfavorable Variance of 130,065 in our Net Sales, this should be disquieting. It is essentially noting that other cost-driving actions and/or sales are not like forecast, or that revenue is lacking due to some unknown factor, or even that the Fixed Costs were inaccurate or more.

Parts of materials for direct resources, labor, engineering, and variable marketing or trading expenditures all faired promising variances and don’t give any problems for CBI as our profits are greater than those that have been planned. Remedial actions within these ranges should be examined, as workers may be carrying out tasks more competently and consequently supervisors can apply these proficiencies elsewhere in other more unfavorable variances.

Taking a look at our Advertising, we note that the planned budget was 28,412, whilst our actual was 31,462. There is a variance of 3,754. This gives an over-budget on Advertising, and should be taken to note because of the fact that the economic realities are still displaying market shrinkage. It would be wise to look into the reasons as to why our Advertising budget was over. There are a number of reasons why this could have happened.

Another Variance we can look at is Transportation Out. Planning Budget indicates 105,300. Actual Output indicated 108,297 with a difference of 5,607; Unfavorable. A possible explanation is that the price of gas might have increased, or the price of oil. In short, our total price Variance we can see is 117,793 with a Favorable Variance.

Another aspect of the Variances is the Contribution Margin. If we look under the Revenue and Spending Variance: Contribution Margin, we will see that we are 43,674, with Favorable Variance. It’s doing fine presently, but still a little low and probably due to an inclement economy. Also, R&D lists are a Favorable Variance at 2,397, and our Total Operating Expenses are satisfactory as well with a Favorable Variance at 4,121.

Pertaining to the Budget; normally, a Budget is prepared for a company on an annual basis. This way there is plenty of time to review it, make changes as necessary, and of course to correct any mistakes long before they could potentially come to fruition. When it comes to a Budget, it is the responsibility of the Management to make the outlines and strategies for all expenses and expense planning for the next fiscal quarter or on an annual basis; all of which can be quickly scaled back so as to reduce any additional Unfavorable Variances. In that regard, it would be agreeable to run a Cost Benefit Analysis.

Our company is going to need to undergo several corrective actions for the Unfavorable Variable of the Net Sales for our company. We should begin an immediate examination for the inconsistency. A precise calculation amount for differences favorable and / or unfavorable to make sure that the managers of the noted departments will be held responsible and put to task for it. Our company, CBI has experienced a notable decline in sales. The Finances manager works with not only accounting, but also operations as well as our engineering group. The divisions work together to clarify the Unfavorable Variance to management. Good Managers are typically motivated to understand why company sales go down. Examining and correcting any causes that may exist are going to involve a more comprehensive examination. There is the very real possibility that we will include higher or senior level management to resolve the problem as well. It cannot be excluded that the likelihood in the forecasting of sales higher than realistically expected can be attributed to the failure to note the present decline in our national economy. CBI therefore; has introduced, for the first time, a company encouragement plan. Bonuses!

Two bonuses were rewarded for deals that were achieved above our regular quota. Manager performance evaluations are affected in either a positive or a negative, and will be bonus focused in order to keep sales at their planned outcome.

Another Corrective Action that Competition Bikes, Inc. can take for its Unfavorable Variance will be for the Advertising Expense. This will elicit a measured examination by our Sales Manager. Since the control of the Budget is in the hands of the managers, along with our strategies to increase sales, this is a possible nook that may well had led to the increase in the costs for advertising. Therefore, our Sales Manager will conduct the examination along with our Accounting Department to determine why it was that we spend more in our Advertising even though our sales and sales budgets were decreasing. Perhaps it was the cost of materials, or possibly the cost of actual advertising placements increased. Did we obtain a 30 second slot in the Super bowl, for example? The examination and the Corrective Action taken will need to be done in a more precise and detailed Budget Analysis.

As for our Unfavorable Variance of Transportation, the measured means to address this will be to open an examination of practices, policies, and pricing with our Operations Division Management. It would be fair to suggest that this is probably due to increases in fuels, and other things such as oil, propane, diesel, etc… Of all our budgetary Variances, this one is really the least surprising due to the invariable nature of fuel price fluctuation. Still, Corrective Actions should be taken to address it. In addition, Senior Level Management should be included in the discussion as there is the possibility that if there is too much variance, a resolution or recommendation may be to switch carriers for cost savings.

We should note something else too; margin’s that are looked at as ‘unfavorable’ contribution can be just as significant as it is a profit analysis. This Unfavorable Variance is mirrored based on how good the company implements itself in the marketplace and will be examined by the division or branch manager’s along with those of our accounting, operations, engineering, and finance groups as well. It is important to have each of these groups involved because each of them will approach the issues with a different perspective, and thus, increase the chances to locate any discrepancies and issue the burden of responsibility. The Variances will be closely monitored to forestall any higher revenue and any abridged costs. The likelihood of success is balanced against the reduction of the variance, which in turn, can possibly entail some new control measures. We can also include our staff to assist us in dropping any hesitance to any implemented procedures or practices that may be required by us for solution to the Variance. The examination will be needed to be made as quickly as possible in order to define any new control procedures we may need to implement.

Senior Management, including the CEO and Owners of the CBI, will going to hold the management to task for the Unfavorable Variances. Corrective action for the unfavorable variance is going to require a series of 3rd party auditing to search for any inconsistency within the budgets. One of the better ways that we may be able to manage our variances is to hold regular conferences to debate the inconsistencies with division leaders. All of the variances of our company will contain management by exclusion procedures to follow up on important adjustments as soon as can be reasonably done.

· The MBE will lower the amount of financial and operational results that our managerial staff is going to need to review. This will allow for them to have more effectual use of their work schedules.

· The MBE report writer linked to the accounting system can be set to automatically print reports at stated intervals that contain the predetermined exception levels, which is a minimally-invasive reporting approach.

· The MBE method will also allow for our working staff to monitor their own methods to accomplishing the results instructed within our corporate budget. Our Management staff need only intervene if an exception arises.

· Using the MBE, a corporate auditor either internal or external, can make reviews about any large exceptions discovered, as a part of a yearly audit, so the managing staff should be able to start investigating any issues well in advance of our annual audit.

Items of revenue or expenditure that show minor changes should need no action for the time being, but instead should be watched closely. Management by Exception can be practical for our corrective actions however. CBI can set the standard by implementing inquiries and examinations, having the division management work with one another to identify any basis for the variances. In addition, to fulfill our company’s MBE, a third party auditing company or group should be hired to root out specific causes of our imbalanced and negative variances. Using a third party auditing company will actually be a more cost effective way to run this corrective action plan. This is because any large-scale investigation by our own management and support staff is going to affect business sales, productivity, production, and even morale to an extent. All of which will directly impact our bottom line. An outside party does not affect these things.

Management by Exception can add to the effectiveness of business methods. The Management at our company will need to pay close attention on any of the variances that are utilizing Management by Exception to amend ineffective standards that might need adjusting. This can also aid as a motivator, by having the management at all levels work with one another in battling the variances in the budget to produce a workable and realistic solution for our budget.

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