Part 1:
There are a lot of changes that can be conveyed to the board of directors regarding the upcoming events. The detailed budget that has been prepared can act as a guide for the management to understand what steps need to be taken, and how things are to be implemented in the company. Mr Wiggins should take the board of directors into confidence that the overall position of the company is strong and it can continued to operate according to the basic accounting principle of going concern. The company, therefore, need not to display its assets at the par value in the balance sheet as it is a going concern and will continue to operate in the coming future. (ACCA, 2014)
There are several things that can be recommended to the board to improve the overall firm profitability and its efficiency. First area to be considered is the month of October 2015. This is the month when the company needs to pay off its loans along with the interest payments. It will be tough month as the company will be cash starved. It needs to make arrangement quickly in order to tackle the situation. It can either borrow more loans, or should reschedule the loan. Another good option for the company will be to carefully develop a plan for repayment and should not leave it for the last month for payment. It should ask the lender to change the payment of loan from one balloon payment to monthly installments. This will save the company from a lot of headache, and its cash position in the month of October 2015, is going to improve. (Elmblad, 2014)
The second area of concern is heavy overtime payment. We can see that there is room for use more labor to produce more goods from January 2015 to June 2015. In these months, the number of labor hours is less than 1200 working hours. This period is an opportunity to produce the required number of goods when the production will be greater than 120 units. It will save the company paying a rate of $17/hr in over time. It will save a lot if it uses the excess capacity available in the months of Jan 2015 to June 2015 to manufacture goods to meet the demand in future months. This is going to save the company a lot of cost. It will eventually increase the overall margin of the company by increasing the cost of sales. Hence, the managers and directors should look into the matter to improve the condition of the company, by proper utilization of resources in hand.
The company is missing the mark of 55% gross margin. They are short by around 3%. They need to reduce their cost of sales. This will come from reduction in labor over time in the coming months. Another area of saving could be to increase the production to reduce overheads. An increase in the production leads to lower average fixed overhead. This is an amazing opportunity for the company to exploit and achieve its target.
Examination of the income statement tells us that Speedy Cycle has a net profit margin of around 33%. This means that the company is incurring around 19% in fixed costs, overheads, taxation, dividend, and loan interest. The company’s net profit margin is going to increase in the next year, since the loan has been repaid in October of this year and also because the taxation amount is €10,000 less. Hence, this margin will rise the next year. The company can control this by introducing some control process that will ensure that the raw material and labor is utilized as efficiently as possible. This expense will help the company to increase its profitability, and to make sure that it outperforms its competitors in terms of efficiency and cost of making goods and services for sales.
The balance sheet is telling us the real problems with the company. The company has too much of current assets lying idle or not earning anything. The current ratio of the company is less than 2. This is a bad sign, as the company can earn return on its assets by investing them elsewhere. The company is reluctant to do so and, hence, it is losing out on the opportunity to earn interest, dividend, profit or rent on this excess cash. The financial manager should take immediate action to correct the situation. She should invest these funds which are liquid and free from reinvestment risk. This will make sure that the company remains liquid and at the same time continues to earn a decent rate of return on their excess resources. Trade receivables of the company have also increased. This shows the weakness of the company in collecting cash from its customers. The company should develop such policies that will encourage its collection staff to make sure that they are collecting the right amount from the debtors. If the collection from the customers is not good, the net cash cycle of the company will be affected and the company will be in financial difficulties.
The company also has too much inventory in its hands. It should implement proper supply chain system in the company to determine how much of each raw material it should purchase in order to make sure that there is no stoppage in the operation and also that there is not too much inventory lying idle. This will be a tough task, as a supply chain expert will be needed to optimize inventory holding and ordering costs. The company should be able to bear this expense by reducing the size of inventory and taking other corrective measures as suggest in this report. It will increase the overall profitability and financial strength of the company. This will make sure that the shareholders keep earning the decent rate of return on their investments, and the company keeps flourishing and keeps achieving the new heights in terms of profitability, assets, and control processes.
Part 2:
Beyond Budgeting is an important approach which is used to identify and eliminate the weaknesses found in the operations of the company by creating efficient budgets. Since, budgets give the company a complete picture of how the things are going to work. It becomes easier for the management to solve any weakness or inefficiencies in the organization. These weaknesses can be bad use of the resources in hand. Sometimes, the companies do not pay much attention to how is it going to use the labor hours. It tends to be reactive and has a small picture, say monthly, in its mind. For example, in the case of Speedy Cycles, the labor is not being used properly. The wastage of normal working hours in the earlier months is costing the firm with high costs in the upcoming months when the production requirement are greater. A good manager would immediately identify the problem by drawing a budget. His first priority would be to save cost by becoming efficient. He will use the unused normal labor hours instead of expensive “over-time” hours to increase the production in the months before the boom season. This will give the organization an opportunity to get rid of the extra expenses, and it will increase the overall profitability of the firm. Many organizations are adopting the approach Beyond Budgeting, and Speedy Cycles should also adopt this approach in order to become more efficient. (Barnistov and Kamboee, 2014)
Budgeting can make an organization rigid. Instead of managers thinking of out of the box techniques, traditional budgets and obsolete techniques are applied to even the new problems of the 21st century. This is where the organization loses out. As the time has elapsed, some of the methods have become outdated, and replaced by new one. The traditional budget approach ignores this fact. Instead of improving efficient or increasing the production by using more machines, or a bigger factory, it relies on increase raw material and labor hours. New machinery and new technology has increased efficiency so much that more can be produced with less input. This concept is called “Synergy”. Traditional budget ignores that completely and hence, it is becoming an outdated tool of accounting, finance, and organizational theory. Hence, Speedy Cycles should develop a new system of budgeting and planning. It should get rid of the old and obsolete systems and procedures. It will ensure that the company will continue to be profitable and efficient. At the same time, it will make Speedy Cycle a market leader in terms of cost leadership.
The new approach that is replacing the traditional budgeting methods is the rolling budgets approach. This approach is very easy to use, and has several advantages over the old and obsolete budgeting process. These budgets are flexible, and encourage the managers to use out of the box thinking to improve the efficiency in the organization. There is a lot of use of KPIs (Key Performance Indicators) and Balanced Scorecard in these budgets. In other words, these budgets take into account not only the financial information and limitations of the operating procedures of company; instead they take into account the core competency of the company. If the company is good in something, it is likely to be more efficient and can perform that task in less time that the other companies will perform. Traditional budgets ignore the use of organizational strategy, core competencies, and important resource at the disposal of the organization that can be used to improve the overall financial health of the company. Rolling budgets do take all of these factors into account, and it is one of the main reasons why they are replacing traditional budgets in the organizational setting. Speedy Cycles should also try to develop rolling budgets for planning and controlling purpose. There should be an intensive reward programme to encourage workers to save resource, and time. Those workers who are able to meet the target and deliver excellent quality work should be reward with extra bonuses, and higher pay rates.
Another important feature of beyond budgeting is its use of benchmarking. Companies should try to copy the best. If it does not do well in something, it should either outsource it, or should try to improve through training. This should be the main aim of any organization. They should be able to match the best in the industry. For example, IKEA follows the Swedish Army’s logistics and tries to match its own logistics with them. Rolling budgets take into account the benchmarking aspect. It encourages organizations to use the numbers that are being showed by the best in the business. This is an important concept in term of efficiency. It encourages efficiency through the optimal use of resources and tries to develop new core competencies for the company. Speedy Cycle can benchmark itself with the market leader. For example, if there is some other firm in the industry doing the business on a bigger scale than Speedy Cycle, it can use the records of that company to determine whether it needs any improvement or not. (Wallander, 2009)
Beyond budget also creates value through delegating the task and having a more decentralized structure. Even Speedy Cycles can outsource some of its task to the production workers, or their supervisors to achieve efficiency. This can be done by constant improvement and training the workers in the workforce to take their own decision. Many times, workers are too afraid of taking their own decision and rely on chain of command. This is becoming outdated and Speedy Cycles should also ask the labor supervisor to produce more goods in less time. The company should also encourage and motivate the workers by giving them bonus on their excellent performance, and if they meet the target of producing more goods in less time. (Hope and Fraser, 2009)
Speedy Cycle’s management has already made up its own mind on how many resources will be needed each month. This is wrong. The resource allocation should be dynamic and it should be on demand. This is something that fosters efficiency in the organization. It will also allow the company to save some of the resources, and sometime budgets are created by the people who are far away from the actual place where the production is taking place. Therefore, the workers may become more efficient by not having excess resource in their hand or nearby them. They will try to produce the goods with the given resource that is slightly lower than the workers actually require producing the specified amount of goods. (Kaplan, 2014)
Another problem with this approach is that it takes into account the entire one year’s plan. Instead, Speedy Cycles should develop a separate budget for each month. It will enable the company to be able to forecast better for the coming months, and make rolling budgets if needed. Speedy Cycle should also make sure that the resources in the company are not being wasted by comparing its own use of resources with the industry average. If the figure is higher than there must be some problem in the operations of the company or the good are being stolen. If the productivity figure is higher than the industry average, then the company is enjoying efficiency. The board should look at this data to understand and get a true picture of the operations of the company and if there is any need, a corrective action should also be taken in order to encourage the workers to work harder, and making sure that the organization is profitable and strong. (Osterstregen and Stensaker, 2011)
References
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