Since decisions by management have long-term effects it is important that they should be based upon a true understanding of the past with a logical estimate of the future. In a small business, detailed knowledge of the business and its environment will be possessed by perhaps one man, but in a larger one this is unlikely to be so and there is therefore a need for a formal fact-finding process. It is likely that there will be a host of factors which could adversely affect the company’s future or, alternatively, which could be exploited if the company were prepared in advance to take advantage of them. Typical questions that the management must consider are: what changes in the business environment will be experienced from now until the corporate plan is achieved, and what opportunities will these bring? What changes in the abilities and structure of the company will have taken place over this same time span? Are these external and internal changes fully taken into account in the company’s long-term objectives?
Forecasting are always establishments which are meant to control expenses and incomes of the company. Budgets have features which makes them be controls to some of the features that a budget needs to have for the purpose of control are; (i) they are prepared by the executives of various departments. (ii) They follow the company policy (iii) they leave room for revision and comparison. Budget without the features above can be very difficult to implement. This is why the management has room for changing when they are brought in.
We said budget are prepared and leave room for comparison and revision because the situation in the competitive world are always dynamic and without a budget which is flexible then it will be very difficult for the management to implement. The budget explains where the company ought to be the next one year, therefore it must leave room for compulsion with the actual in order to sustain discrepancies which needs to be corrected. Control can only take place where the plan or the budget if is flexible and the result is miserable, if this is not possible then frustration will crop in.
In preparation of a budget the issue of control is kept in mind, therefore the executives who are preparing budgets and also aware that once it represented to the senior management they will have to slash part of the budget. Since the budget is a control tool which can be measured by the following diagram.
For managers a budget is a control tool which gives directions to the long term goals of the organization. When they have been represented to the organization even if how good they are managers must ensure that they comply with the long term organizational goals. A budget in a such a situation becomes only an anticipation of the effects of the past decisions and expected future influences which can produce positive or negative results.
Budgets are prepared by various departments of the organization and it represents decisions of various executives. These decisions must be brought together on peace meal basis in order to coordinate all activities of the organization. This can be possible if the managers checks and ensures the budget of department AB&C are well coordinated to produce effective and efficient results for the organization.
Managers when represented with budgets they will have to slash them or shifts some costs to assist in product differentiation through research and development. To an ordinary business departmental manager he may see the slashing of the budget from his department to research and development as one way of reducing the importance of his figures but in the long-term it is the best decision because there will be improvement in the product and there will be research for costs for product differentiation.
A budget is a forecasting of future revenue requirements and future costs that are expected to be incurred, this include the forecasting of sales through estimating population changes, movement in commodity prices, assessing the factors of production, political factors affecting the product and many other issues before coming up with sales. Therefore when a manager is slashing the budget he should not touch the sales of the organization if he has not considered these factors. When the sales department is focusing sales they consider the following factors. (i) Population changes (ii) changes in prosperity in specific areas indicated by personal incomes, company profits, etc. (iii) competition and technological changes (iv) political factors, e.g. trade alliances, development projects, import and export regulations. (v) Movement in commodity prices (vi) sales promotion policy (vii) scarcity of factors of production (viii) efficiency and structure of distribution arrangements (ix) customer goodwill (x) company pricing policy. (xi) Age of products and development of new products. If then the slashing of the budget does not consider this factors then that manager or the executive who does that needs to be kicked out to the streets since he does not consider and facts when making such a decision.
It seems some revenue includes revenue which holidays have been cancelled and this account a large part of the profits. This means if all the holidays are taken the company profitability will be reduced drastically to the level of making losses.
Any movement in price changes in the market should also be considered especially this time of inflation to cover for changes in the interest of capital. Price changes affects both the client and the company. Thus when considering price adjustment due to inflation Asean travel ltd should be reasonable.
The policy of company in relation cancellation should be revised to attract new customers as well as maintain existing customers otherwise they will lose customers and be forced out of business.
Income is recognized as revenue at whatever time the company delivers or performs its merchandise or services while at the same time receives payment for it. However, in this case it is recognized upon holidays be taken while the there is no refund to the customers in either situations. In my opinion full accrual method should be used. This method considers all the significant risks and rewards of ownership reside with the interested buyer, in addition to these, there is no ongoing duty or participation by the seller post sale particularly after closing and lastly, according to this method, there is no future subordination of any interested buyer receivable-seller. It is worth noting that the full accrual method intimately resembles the basic essential accrual method.
Budget is a representation of the business plans for a specified period. Budgets also serve as an extremely useful tool for communication, coordination, measurement of success and also motivation. The contemporary budgetary practices have their origins in the factory systems. Historically, when the business owners established factories creating production capacity, budgets were created to cater to the fixed maximum production possible in the installed capacity. These practices allowed business owners to monitor the factory performance based on installed capacity dimensions. This was valid when all of factory production was clearly lapped up by the market place (Appreciating Flexible Budgets, 2008).
The same practice was extended into the forward supply chain also until the consumer point. This was actually valid when all of production capability/capacity was accepted by the market place without a demand-supply gap or demand outstripping the supply. This practice actually has given rise to the fixed budget practice. Fixed budget is a budget wherein certain assumptions of production and sales are made and adhered to over a given period of time. As mentioned earlier, it is pertinent to note that there should be no demand-supply gap or the demand should outstrip the supply (The ICFAI University Press, 2004). It is predominantly based on a sole level of activity.
A fixed budget performance report compares data from actual operations with the single level of activity reflected in the budget. It is based on the assumption that the business will work at a specified level of activity and that a stated production and sales will be achieved. These budgets do not change when production level or projected sales change or vary.
Some of the current challenges businesses face includes:
• A growing emphasis on creating customer value and improving customer service;
• An increasingly competitive marketplace with a rising rate of innovation;
• Reduced cycle times and shortened product development times;
• A need for organizational adaptation because of changing business rules and assumptions;
• A requirement to operate with a shrinking number of assets (people, inventory, and facilities);
• A reduction in the amount of time employees are given to acquire new knowledge; and
• Changes in strategic directions and workforce mobility that lead to knowledge loss.
The scenario has dramatically changed with factors such as rising competition, continuing globalization and other dimensions of contemporary business environment. In the contemporary business environment, supply outstrips demand and the dimensions that need to be considered and accounted for to conduct business are very dynamic. In such a situation, the methods of fixed budgets seem to be lacking in giving accurate information about the health of the business to all the stakeholders of the business.
In the highly competitive environment, the survival of an organization may depend on how well stakeholders are managed. However, when managers delegate this responsibility of managing the stakeholder interests, there is no systematic way to evaluate their performance (Slovensky, 2002).
One of the most important operating decisions that a management must make is the pricing decision. Pricing refers to the assignment of a selling price to a product or service provided by the company. A company’s long range survival depends on its pricing decision. In the long run, the firm’s prices must be sufficient to cover all costs and leave a profit margin, adequate to reward the investors. If the firm’s revenue consistently fails to cover costs and provide a satisfactory profit, the investors will seek new opportunities and the firm will fail.
Pricing activities are more extensive than many people realize. It is easy to visualize the need to price each product in a department store or electrical goods store, but all organizations that provide a service for a fee or sell a product must decide on the amount to charge for each service or product. Thus the number of products and services to be priced is quite large. Besides that, pricing does not end with a single price decision for each product or service. Prices must be continuously updated to ensure that they reflect management’s desires in light of current costs, market conditions, and competitor actions.