Global Business Economics & Finance Report

Introduction

The construction of a loading bay is a costly project in terms of both money and time, so it is important to plan ahead the expenditures that will be incurred from the start of the project to its completion (Lee & Lee, 2009). In addition to the expenditures, emergencies, contingencies, other unexpected economic fluctuations such as inflation have to be covered in the budget. The purpose of this report is to draw up a budget for the proposed loading bay whose estimated total budget is £882,000. Alongside this budget, tools for monitoring expenditures will be developed and regularly updated in order to reflect the real budgetary estimates. Given that the approach to drawing up the loading bay budget will have a direct impact on the achievability of the budget, the importance of the approach used cannot be over-emphasized. The budgeting method or approach will be incremental since this year’s actual results will be used to prepare next year’s budget. Marginal changes will be made to this year’s budget in order to come up with next year’s budget.

Relevant calculations to prove that the budget is achievable will cover the third part of the report. The calculations will be based on this year’s actual calculations. Adjustments will be made based on the next year’s estimates, percentage increments, redundancies, economic fluctuations, and other factors. Since we are working with a fixed budget, the estimates should sum up to £882,000. The purpose of the calculations is to show the practicability of the budget and ultimately its achievability (Aziz & Shah, 2020). The fourth part of the report will be a detailed discussion of the proposed budget with full figures. The efficiency of each component of the budget will be discussed in this section. In addition, a realistic and complete justification of the budget estimates will be discussed in this section. The justification will include categorical descriptions of every each expenditure and other relevant information that may be necessary. The fifth section will be a conclusion on the achievability of the £882,000 overall loading bay and finally, the sixth part will provide recommendations for improvement. The final part includes the bibliography page, which contains a list of references of borrowed information.

Approach to Drawing up the Loading Bay Budget

Organizations can choose several budgeting approaches to perform operations depending on budgeting needs. It should be understood that when applied effectively, any approach can help a company to accomplish its fiscal management goals (Cardoş, 2014). Some budgeting approaches are, however, complicated compared to others. Compared to others, the incremental budgeting approach is a simple method and easy to implement. It is ideal for organizations like Clark Casc Logistics plc with steady budgets that change gradually. With an incremental budgeting approach, the current year’s budget is used as the base for preparing the next year’s budget. One of the main assumptions of this method is that the whole organization, as well as the departments, will operate within the previous year’s budget.

The incremental approach will work by taking the expenditures from the current financial year as the estimated expenses for the next year. Increments of various amounts will then be added or subtracted to the expenses to reflect an increase or a decrease for the coming financial year (Kim & Park, 2006). In the case of Clark Casc Logistics plc where we have a fixed budget of £882,000 with few or no fluctuations, the incremental budgeting approach will function properly. Further, given that the construction of a loading bay can be categorized as a long-term project, incremental budgeting will be the most ideal approach. A primary advantage of the incremental method is the fact that it is easy to use. It functions well in organizations or in projects where there is a guarantee that funding will continue in the foreseeable future. Furthermore, this approach requires few or no fluctuations in the allocation of funds. With incremental budgeting, the management is able to understand the budget better. The budgeting team is also able to minimize conflicts amongst the various departments over the allocation of funds. By eliminating inter-departmental conflicts, this approach helps organizations to achieve operational stability for a long period of time.

Critics of incremental budgeting argue that this approach does not encourage innovation since departments tend to spend the same amount of money over and over again to justify the allocation. There is no incentive for coming up with new ideas, and in most cases department will utilize funds even if the need for such funds no longer exists to avoid interfering with the coming year’s allocation. In fact, this method encourages over-spending since any drop in expenditure in a particular financial year affects the preceding years (Kim & Park, 2006). Opponents of this method also argue that this approach assumes that only slight changes will be made from the current budget when preparing the next year’s budget which may be far from the truth. In reality, major structural changes may occur in the coming year which may require significant changes in the allocation of funds. As a result, huge variances may occur between the budgeted allocations and the actual results. Furthermore, when a budget is based on the previous year’s budget, there is no incentive to carry out a comprehensive review of the budget (Vaznonienė & Stončiuvienė, 2012). As a result, inefficiencies and budget slacks of the current financial year are rolled over into the subsequent budgets.

Overall, consistency and simplicity are the key advantages of the incremental approach to budgeting. It does not require complicated financial calculations that are common in other budgeting techniques. It allows managers to save time and money in preparing the budget, so they can focus on other important operations of the business (Kim & Park, 2006). However, this method is subject to some adverse effects such as the lack of incentive for innovation. For companies operating in a fast-paced environment, incremental budgeting may not be the most ideal method. However, for companies where few or no fluctuations in budgetary allocations are expected, this method is effective. For example, where the managers are confident that the budgets will remain relatively stable for a long time, with minimum fluctuations, this method should be applied. Clark Casc Logistics plc, for example, is suitable for this method given that the proposed construction of a loading bay worth £882,000 is a long-term project that requires regular funding with minimal fluctuations.

Relevant Calculations to Show Achievability of the Budget

The table below shows the expenditure for this year which will be subjected to increments to come up with next year’s budget;

3% increase in staff wages means that the new staff wages cost (0.97*£542) for the next year becomes £525.74. The staff wages is further subjected to redundancy of 10% which means that the final staff wages for next year become £473.166 (0.9*£525.74).

At least 10% of the equipment is redundant and could be sold or offered to another department. This means that the cost of equipment maintenance will decrease by 10% from the current £84 to £75.6 (0.9*£84).

Heating and lighting costs will decrease by 5% over the first six months next year, then increase by 3% over the next 12 months. This implies that the cost over the first six months will be £28.5 after which the cost will increase by 3% over the remaining period to £29.355.

Refrigeration costs will go down by 40% after repair from the current £8 to £4.8 (0.6*8). As a result of this repair, the equipment maintenance costs will go higher by a further £1 from the estimated £75.6 to £76.

Other costs will be increased from the current £12 to £27 to cover emergencies and economic fluctuations such as general change in prices of commodities, prices of construction materials, and other contingencies. Other costs also take into account the inflation of 0.008% in the current year. It is assumed that the general increase in prices will continue in the next year.

Overall, after the adjustments, there is a significant saving of £74,000 for next year’s budget compared to this year’s budget. The significant reduction of costs such as staff wages, refrigeration costs, heating and lighting combined lead to a decrease in the total expenditure for next year’s budget. However, some costs such as equipment depreciation, buildings maintenance, and apportionment of central administrative costs, insurance costs, and building depreciation are not expected to change. It is assumed that these costs will remain unchanged over the next year or will operate below the stated budgets.

Therefore, next year’s loading bay budget in comparison with this year’s actual budget will be as follows;

Proposed Budget with Full Figures

The proposed budget for the next year will have ten expenditures, including wages and employers’ national insurance and pension contributions which will account for £473,000 of next year’s budget accounting for 53.62% of the entire budget. Equipment maintenance will cost £76,000 of next year’s budget accounting for 8.6% of the entire budget followed closely by equipment depreciation which will cost £74,000 of the budget representing 8.4% of the budget.

Buildings depreciation will cost £56,000 of the budget while buildings maintenance will cost £34,000 representing 6.3% and 3.9% of the entire budget respectively. The apportionment of central administrative costs will cost £84,000 of the budget, which is a huge chunk representing 9.5% of the whole budget. Heating and lighting will claim £29,000 of next year’s budget which is 3.3% of the budget while insurance costs apportioned based on past claims will cost £24, 0000 representing 2.7% of the budget. Goods refrigeration will occupy £5,000 of the budget while other costs will amount to £27,000 of the budget representing 0.5% and 3% of the entire budget respectively.

A conclusion on the Achievability of the £882,000 Loading Bay Budget

Based on the above calculations, the budget looks achievable for the proposed loading bay. The increase in costs may cover unexpected mishaps in the budgets since it is a significant increment. However, the provision for other costs may not be enough if there are significant changes in the prices of commodities like construction materials. As a result, there may be huge variances between the estimated expenditure and the actual budget needed to complete the proposed loading bay. Thus, although the enforcement of this budget seems easy on paper, its achievability will depend on many factors.

Recommendations on the Next Steps

In order to improve the budgeting process and to support better decision-making about the construction of the proposed loading bay, the use of a better model of budgeting is inevitable. Changing the procedures and the approach used to develop the budget would help the managers to be more objective. For example, applying a zero-based method instead of an incremental budgeting method. Under the zero-based method, next year’s budget is prepared from the scratch, so apportionment of funds is done based on importance without considering past budgets (Ibrahim, 2019).

As opposed to incremental budgeting where allocation of funds is done without considering vital activities, zero-based budgeting allocates maximum resources to only those activities that are more beneficial to a project. For example, if the zero-based method was used instead of incremental budgeting, more crucial activities like the purchase of equipment, furniture, and fittings would have been allocated the highest amount in the budget instead of staff wages cost. In addition, a zero-based budget would have categorized the expenditures on the basis of importance as opposed to previous allocations, which is often misleading.

Furthermore, given that zero budgeting is developed from scratch, resource allocations would have been done after taking into consideration factors like cost-benefit analysis as well as risk-reward analysis. Goode & Malik (2011) notes that managers need to have specialized skills under the zero-based method of budgeting as only well-trained personnel can prepare such budgets. More often, preparing a zero-based budget requires the services of qualified accountants with impeccable experience who understand well the budgeting process. Besides preparing a more practical budget, engaging professionals only in the preparation of budgets would increase the chances of achievability of the budget. It would also minimize the chances of having huge variances between the estimated and the actual budget, which is common under incremental budgeting.

Finally, using incremental leads to wastage of resources on unnecessary expenses as reducing any allocation would jeopardize allocations in the subsequent periods. However, under zero-based budgeting, allocations are done on the basis of priority. According to Libby & Lindsay (2007), using the zero-based method would eliminate all kinds of inefficiencies and lead to money savings instead. Further, since the zero-based budget is done from the scratch, the management is more innovative in coming up with ideas for cost savings. Justification of resource allocation is also easy under the zero-based approach compared to the incremental budgeting approach.

Overall, a zero-based approach to budgeting is more dynamic while incremental budgeting is considered more conservative. Although the zero-based method is time-consuming and more complicated compared to the incremental method, it allows businesses and managers to reduce costs and minimize needless expenses (Ibrahim, 2019). The application of this method allows managers to be smart in making decisions concerning resources allocation and prioritizing. Therefore, if zero-based instead of incremental budgeting method approach was used on the proposed construction of a loading bay worth £882,000, chances are that the project would consume a lesser amount, take shorter to complete, and be more effective.

References

Aziz, H., & Shah, N. (2020). Participatory budgeting: Models and approaches. arXiv preprint arXiv:2003.00606.

Cardoş, I. R. (2014). New trends in budgeting–a literature review. SEA–Practical Application of Science, 2(04), 483-489.

Goode, M., & Malik, A. (2011). Beyond budgeting: the way forward?. Pakistan Journal of Social Sciences (PJSS), 31(2).

Ibrahim, M. M. (2019). Designing zero-based budgeting for public organizations. Problems and Perspectives in Management, 17(2).

Kim, J. M., & Park, C. K. (2006). Top-down budgeting as a tool for central resource management. OECD Journal on Budgeting, 6(1), 87-125.

Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application. World Scientific Publishing Company.

Libby, T., & Lindsay, R. M. (2007). Beyond budgeting or better budgeting?. Strategic Finance, 89(2), 46.

Vaznonienė, M., & Stončiuvienė, N. (2012). The formation of company budgeting system: importance, problems and solutions. Management theory and studies for rural business and infrastructure development, 30(1).