BTEC HNC - Business Systems - Financial Planning and Control

8/2/2019 BTEC HNC - Business Systems - Financial Planning and Control

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Analyse the Key Functions of

Financial Planning and ControlBusiness Management TechniquesBy Brendan Burr


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Brendan Burr BTEC Higher National Certificate in ElectronicsBusiness Management Techniques

Table of Contents

TABLE OF CONTENTS ........................................................... 2

TASK 1 ................................................................................ 3

Identify and describe appropriate financial planningprocesses. Look at short, medium and long term plans,strategic plans, operational plans, financial objectives andorganisational strategy. ...................................................... 3

Solution:- ......................................................................................... 3

TASK 2 ................................................................................ 6

Examine the factors influencing the decision-making processduring financial planning. .................................................... 6

Solution:- ......................................................................................... 6

TASK 3 ................................................................................ 9

Apply standard costing techniques and analyse deviationfrom planned outcomes. ...................................................... 9

Solution:- ......................................................................................... 9

EVALUATION ..................................................................... 12

CONCLUSION ..................................................................... 12

Books ............................................................................... 13

Catalogues ........................................................................ 13

Websites ........................................................................... 13

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Task 1

Identify and describe appropriate financial planning processes. Look at short,medium and long term plans, strategic plans, operational plans, financial objectives and organisational strategy.

Having established a price for your new product and identified the potentialmarket, the finance department have asked you to meet them and discuss thefinancial planning process.

Solution:-

Financial planning is essential for the business to achieve thenecessary objectives and targets. To formulate a financial plan, we willgenerally have to do the following:

a) Work out the Company policy, profit targets, and long term plans.b) Prepare forecasts for sales, production, stocks, costs, capital

expenditure, and cash.c) Compile these separate forecasts into a master forecast.d) Consider all the alternatives available and select the plan which

gives the best results.e) Review limiting factors and the principal budget factor.f) Prepare individual budgets and finally the master budget which

includes a forecasted profit and loss account, and balance sheet.

There are numerous considerations to look at when determining thefinancial plan, breaking them down into sub-categories will help meexplain how each is relevant.

Short, Medium and Long Term Plans The Companys Board of Directors will have determined the directionthe Engineering Company needs to be heading in. The objectives areset by the highest officials in the Company to ensure clear orders aregiven to all members of staff. This motion is the Companys Long TermPlan, and it could be achievable in a time frame such as 3-5 years or even more. From this Long Term Plan, smaller stepping stones needto be identified, to ensure the Company is maintaining the samedirection whilst completing projects.So for example a Company may be aiming to increase its profitmargins over a five year period ensuring profit can be generated in thefuture. To do this the company may need to upgrade its facilities toimprove the quality of products, ensuring that more revenue can begenerated from each unit. This would be based across a time period of 3-4 years making it a middle term plan. Then individual products mayneed to be redesigned in the short term, 0 2 years.

Short, Medium and Long Term Plans do not have fixed time periods

and are completely determinable by project itself.This type of planning is often used in the various sectors of anengineering company, so for my example above it may be set by theCustomer Services sector.

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This will allow financial budgets to be set accordingly, as financing allof the Short Term Plans should cover the costs of achieving the LongTerm Plans. It is however, likely that the Short Term Plans will not allhappen at the same time, so it is important to note that finances do nothave to be delivered entirely at the start.

Strategic Plans Strategic Plans generally cover the company as a whole, and willinclude all of the Long Term Plans of all the sectors.

A common strategic plan for most companies is to be the best at whatthey do, and beating all of the other companies who provide a similar service. The way they will do this is by being at the cutting edge of technology for example, by heavily investing in something which couldprovide the best service.The company will predict future trends in the markets and customer requirements and then base their planning on this. So for example abook publisher will print millions of copies of a new book, with theprediction that they will sell. If they do not then the publisher hascreated a deficit which may create devastating consequences for their company. On a similar basis an engineering company may invest inbuilding new facilities based on future demands, if these demands tonot arise then the engineering company may find themselves withfinancial difficulties.Financially a company will invest money that has been accumulatedfrom profits on other products, to ensure that the future development of others is capable. However sometimes companies will use loans to

produce new facilities, where a deficit caused by lack of sales wouldresult in the company potentially becoming bankrupt.

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Operational Plans Operational Plans should establish the activities and budgets requiredfor each part of the company for the next 1-3 years.The Op Plans should ask four basic questions:

o Where are we now?o Where do we want to be?o How do we get there?o How do we measure our progress?

The plans should be prepared by the people who will be involved in theimplementation of the tasks. Also it is likely that there will need to beinterdepartmental discussions, as the processes from one departmentare likely to have an impact on other departments.The Op Plans will enable the required actions to be considered andtherefore put in place. This will mean that financially the budget will beset up accurately from the outset, preventing wasted expenditure as

well as time.

Financial Objectives The main financial objective is for the company to make money.Unfortunately it is more complicated as this process will need to bebroken down into smaller requirements. The company may be facing atime of financial recession, so the objective may be to keep earning astable income throughout this time. Other objectives include anincrease in revenue in a year, or even an increase in share dividends.The aim of the financial objectives is to make the company financiallystronger within a certain time period (usually within a financial year).

Organisational Strategy Using organisational strategy the company will decide which areasrequire financial support at certain times. For example the Designphase will occur at the beginning of a project, with the marketing of thefinished item not beginning until the product is nearly or entirelyfinished. This will allow for money to be freed up to the desireddepartments at the required time.It is important for companies to have this area running as efficiently aspossible, so that the when one project has moved past the designphases, it can be replaced with a new project with a new budget.

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Task 2

Examine the factors influencing the decision-making process during financial planning.

Solution:-

There are multiple factors which need to be taken into considerationduring the decision making process of the financial planning stages.We will need to determine what type of finance option we will haveavailable to us, to be able to plan accordingly.

Beginning with working capital management; the current fixed assetssuch as plant and equipment are compared against the current

liabilities such as financial loans. This is known as working capitalmanagement and involves managing the relationship between theassets and liabilities, ensuring that a company is able to continue itsoperations and that it has sufficient cash flow to cover both maturingshort-term debt and future operational expenses.Working capital is the amount of capital which is readily available to thecompany, because of this it is only used for planning over a short termbasis. We will have to take into account things like the cost of rawmaterials and how long it will take to receive this money back fromsales.By comparing and evaluating the amount of money it is costing tomanufacture a product or deliver a service we should be able tosuccessfully put a price on each unit and the amount of units requiredto cover our costs. This would be done through a break even chart(which has been explained and exampled in Assignment 2 of this Unit),enabling us to put a price per unit with relative accuracy within a fixedenvironment. However in the business world it is not a fixedenvironment and external factors can easily have an effect on our products, even if they arent directly related to us. An example wouldbe; an air transport company suffers from an increase in fuel prices andtherefore increases its delivery charge to its customer, the samecustomer which imports materials to produce components are our supplier and therefore the cost of manufacturing our product will beincreased because of the initial fuel price hike. Overall we may have tofind ways of reducing our manufacturing costs, find a new and cheaper alternative, or increase the price of our product to accommodate for thechange.Changes in pricing and sales and then revenue generated from thesesales can take months at a time, so it is important to have good creditcontrol management to ensure that they are always in the position toapply for a short term loan or overdraft system if the company suffers abad period. It is impossible to predict the outcome of a business

venture as there are so many variables, so it is good to have theavailability of a get out clause, just as long as the revenue does beginto flow in again, otherwise the company will find itself in a large deficitwhere it owes more than the value of its assets.

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Expansion and contraction of the economy is also a factor which mayneed to be considered. Expansion is where there is an increase in thepace of economic activity, whereas contraction is where there is adecrease. When there is a decrease which is severe enough, it willcause a recession. This will have an adverse effect on the company asexchange rates will be less favourable for exporting goods, and overallit is regarded as a time for desperate measures which may cripple acompany.The value of the company is in the interests of the company owners,which may also stretch to shareholders. There are various factorsconcerning a company valuation, however the most basic approach of explaining the process is by a financial analysis of the companyssituation, for example liquidity, turnover, profitability and thencomparing this to other companies in the same industry. A companyvaluation could be considered a way of tracking the successfulness of a company, however there usually has to be good reason for getting acompany valuation.

In brief with budgetary planning the company can take monthlyrevenue to pay for the previous months expenditures through thecreation and monitoring of budgets. Again, it is not as simple as this asthere is a breakdown of requirements which all need to balance out toensure that the company will make a profit rather than a loss on amonthly basis, or if there is a loss then it will be covered for in the near future by taking the necessary action when the problem arises.Within the breakdown of requirements, I will begin by explaining briefly

zero-based systems. This is where every function within a company isreviewed when regarding a new project, rather than basing futureincome and expenditure on previous outcomes. A similar approach istaken by individuals when dealing with personal finances. When a newexpenditure arises an evaluation of current incomes and expendituresare considered, and then appropriate actions taken; like reducing theamount of a standing order into a savings account accommodating for the new outgoing. An advantage of this system is that it keeps theallocation of finances very lean, however a disadvantage of this systemis that the process is very exhaustive and time consuming which initself can have detrimental effects.

The next area I will briefly explain is incremental budgeting. This formof budgeting uses a previous periods budget as a base, withincremental amounts added for the new budget period. This approachis not recommended though, as it promotes the use of the use it or lose it term, as if a sector doesnt use its entire budget in the fixedperiod then they will be allocated a smaller budget for the next period.

An advantage of this system is that the budget remains relatively stableas the change is gradual, however a disadvantage of this system isthat the system assumes the activities and methods of working willcontinue in the same way, when this is not at all likely.The impact of revenue generated from the sale of goods or serviceswill have a large effect on the financial planning stages. This isbecause it is the balance of the income against expenditure whichdetermines how well a company is performing, so with less revenue the

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company is in a weaker position to invest in new facilities or other company necessities.Similarly if costs increase and the income stay the same then thecompany will find itself in a weaker position than if the costs of manufacturing for instance decreased.Capital control is a Government policy which restricts the acquisition of foreign assets and visa-versa. This would implicate the financialplanning process as it may mean that the operations will have to becarried out in a facility which may cost more to run. It may also affectthe amount at which services or goods can be sold at within a foreignmarket. It is put in place to soften outsourcing of production of products to foreign countries, on the economy of the host country.

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Task 3

Apply standard costing techniques and analyse deviation from planned outcomes.

You are planning to spend money to get your project to work and there will bea requirement on you to establish your budget for your project.Now! A budget is an estimate of what you will need to spend and in a lot of cases the proposed budget will be exceeded.

As part of this task you must, after you have established your budget, tell youMD (me) the areas that are likely to be exceeded and why.

Solution:-

The following chart is a breakdown of the components required for the

manufacturing process of the project to take place. The pricing is for aone off unit, I will later on compare the pricing of a mass producedproject of 1,000 units.

Part Quantity Approximate Cost Total Approx CostLCD Screen 1 20.00 20.00

Push Buttons 5 0.20 1.00Power Supply 1 15.00 15.00

Relays 4 5.00 20.00Microcontroller 1 5.00 5.00

Oscillator Components 1 3.00 3.00LCD Components 1 3.00 3.00

Case 1 5.00 5.00Voltage Regulator

Components 1 6.00 6.00

Printed PCB 1 10.00 10.003.5mm Stereo Jacks 6 0.50 3.00

100m Cable Reel (Red) 0.02 5.00 0.10100m Cable Reel (Black) 0.02 5.00 0.10

1m Solder Reel 0.1 5.00 0.50TOTAL 91.70

The following chart is a breakdown of the required one off componentsI will need, which will not need to be purchased with every unit made.

Part Quantity Approximate Cost Total Approx CostPrototyp ing Board 2 12.00 24.00

Tooling (Set) 1 20.00 20.00Computer 1 700.00 700.00

Design Software 1 1,000.00 1,000.00PIC Programmer 1 150.00 150.00

Soldering Iron 1 10.00 10.00TOTAL 1904.00

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The costs of the one off components should not change if I were tomass produce the same project. There may however, be an increasein the costs if parts need to be replaced due to wear and tear.

I will now base my parts order on the production of 1,000 units.

Part Quantity Approximate Cost Total Approx CostLCD Screen 1 5.00 5.00

Push Buttons 5 0.02 0.10Power Supply 1 3.00 3.00

Relays 4 0.20 0.80Microcontroller 1 0.20 0.20

Oscillator Components 1 0.50 0.50LCD Components 1 0.50 0.50

Case 1 0.70 0.70

Voltage Regulator Components 1 1.00 1.00

Printed PCB 1 4.00 4.003.5mm Stereo Jacks 6 0.05 0.30

100m Cable Reel (Red) 0.02 4.50 0.90100m Cable Reel (Black) 0.02 4.50 0.90

1m Solder Reel 0.1 4.50 0.45TOTAL 18.35

By making 1,000 units I am cutting the costs of parts by 80%, so theprice per unit is now only 20% the original cost of a one off product!

Now I will talk about the sales costs of this product, to better understand the sale price per unit that will be required to ensure thatthe costs are covered and that there is a profit made from the project.

I will divide the costs of the fixed costs into 1,000 and then add this tothe component costs of 18.35.

1,904 / 1,000 = 1.9041.904 + 18.35 = 20.254 per unit

So as long as my costs do not increase, I should charge a greater amount than 20.26 to ensure that my expenditure is cancelled out.

Any income made above the 20.26 mark will be profit.

Unfortunately any revenue I will make from this project will happen inthe future. This means that I will have to find some funding fromanother source to be able to begin the business venture. For me toafford all of the parts required for 1,000 units I will need to spend:20.254 x 1,000 = 20,254. This does not take into account for anyfailure with components or mistakes made in the manufacturing

process, so it would be best to add an additional 2,000 to the budgetto ensure the full 1,000 units can be produced.For an individual this is a lot of money, so it is understandable to beginon a smaller scale which is more easily manageable, but the price for

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parts may increase because of ordering smaller quantities, so there isa fine line between the number of units which is best and the number which will see the project fail.It may only be affordable to produce 10 units per calendar month asthe manufacturer may need a source of revenue. If this is the casethen the profit will be very small per unit and would likely be spent onthe acquisition of new parts for more units, due to a slow cash flow.

The causes of variance in the component costs could be detrimental toprofits. As this is an area which is out of the control of themanufacturer (as components are likely to be bought in) it may besuitable to allow an additional cost to cushion any impact a priceincrease would have. The causes could be due to many things, suchas the price increase of raw materials, transportation cost, fuel prices,or any other economic situation.Errors with the budget calculation could also arise when implementingthe manufacturing process as there may have been things which areneeded but havent been budgeted for. This could be things like theamount of labour hours which may be required to produce assemblies.If it takes 100 hours more to complete 1,000 units than has beencalculated then the effect on the final cost could be substantial asskilled fitters would earn approximately 40.00 an hour. This would fallunder the unrealistic target setting criteria as an unreasonable targethas been set for a certain objective to be met.Budgetary slack can occur in two forms, either when the amount of revenue is underestimated for a given period of time, or when the

amount of expenditure is overestimated in a given period of time. Theproblem creates a budget which has been distorted compared to theform it should be, this in turn prevents budgets from working properly.

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EvaluationI took my time completing this assignment as I had commitments in other areas which I felt needed to be completed first.

Beginning with Task 1, I carried out a lot of research from various internetsources and books before beginning my answer. This approach gave me anunderlying knowledge of the subject which helped me cover the aspectsrelated to the question with my own words.Without the research I struggled to keep on track of what needed to be said,as I was going off of common sense more than known fact. It wasnt until Icompleted the research that the question began to make a bit of sense as tothe key differences between the types of various plans.For Task 2 I had to examine the various factors which can influence thedecision making process. This involved me carrying out further research onthe various factors found at the top of the page on the assignment. It was

during this Task that I found out the depth required in the planning stages of aproject, and the amount of external sources which can have a deciding factor with budgets. I learnt quite a lot from this task, however I found it was verytime consuming.I enjoyed Task 3 a little more than the other two tasks. I involved my projectand stated that I would perform the calculations based on the production of 1,000 units as this would be a suitable figure for a mass produced product. Itwas interesting to see the cost of the parts decreasing to 20% of the originalquotation. The impact this would have on the overall profit margins wouldmake the project an absolute success or an absolute failure. The onlydifficulty is that you would have to use the phrase you have to have money,to make money as it would cost tens of thousands of pounds to purchase allof the necessary components required to make all of the units.I found it interesting to think of my project on the large scale, but it seems thatit is only by doing this that any money can be made, as one-offs will cost asubstantial amount more and therefore adding a profit margin to this as wellwould seem like day light robbery!

ConclusionI will openly admit that I am interested in learning business techniques, suchas planning, as they help me understand the processes of projects that I workon within the workplace. I do not, however, enjoy writing about the subject asI often find that I am stuck on how to explain a technique, and because of thisit takes a long time to complete Tasks, which in turn is demoralising andfrustrating.I am keen to make a start on assignment four of this unit as it involves myproject which is heavily underway now. I also still need to complete a Task onassignment one so that entire assignment can be signed off.

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Bibliography

Through guidance from my lecturer, the following text books, catalogues andwebsites I was able to complete this assignment:

BooksHigher National Engineering (Mike Tooley & Lloyd Dingle)ISBN: 978-0-7506-6177-5

CataloguesN/A

Websites

1. http://en.wikipedia.org/wiki/Operational_planning2. http://en.wikipedia.org/wiki/Working_capital 3. http://en.wikipedia.org/wiki/Zero-based_budgeting4. http://en.wikipedia.org/wiki/Price_system5. http://en.wikipedia.org/wiki/Revenue6. http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/H

NDBIT1Workbookweek12.html7. http://economics.about.com/cs/studentresources/f/business_cycle.htm8. http://en.wikipedia.org/wiki/Business_valuation9. http://www.answers.com/topic/budgetary-slack

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http://en.wikipedia.org/wiki/Operational_planninghttp://en.wikipedia.org/wiki/Working_capitalhttp://en.wikipedia.org/wiki/Working_capitalhttp://en.wikipedia.org/wiki/Zero-based_budgetinghttp://en.wikipedia.org/wiki/Price_systemhttp://en.wikipedia.org/wiki/Revenuehttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/HNDBIT1Workbookweek12.htmlhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/HNDBIT1Workbookweek12.htmlhttp://economics.about.com/cs/studentresources/f/business_cycle.htmhttp://en.wikipedia.org/wiki/Business_valuationhttp://www.answers.com/topic/budgetary-slackhttp://en.wikipedia.org/wiki/Operational_planninghttp://en.wikipedia.org/wiki/Working_capitalhttp://en.wikipedia.org/wiki/Zero-based_budgetinghttp://en.wikipedia.org/wiki/Price_systemhttp://en.wikipedia.org/wiki/Revenuehttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/HNDBIT1Workbookweek12.htmlhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/HNDBIT1Workbookweek12.htmlhttp://economics.about.com/cs/studentresources/f/business_cycle.htmhttp://en.wikipedia.org/wiki/Business_valuationhttp://www.answers.com/topic/budgetary-slack

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BTEC HNC - Business Systems - Financial Planning and Control