Introduction
Budgeting is a critical aspect of any business as it helps the management to plan for the future. Additionally, it is crucial since it helps an organization control its finances, ensure that it can fund its current commitments, meet its objectives and make confident financial decisions, and have money for future projects. A budget is a statement of the expected expenditure and incomes of the business that has been allocated over some time.
According to Management Direct (2020), operating a business comes with costs, and therefore, a company needs to engage in proper budgeting to minimize these costs and thus, ensure that the company is achieving improved profitability. By preparing a budget, a company such as Clark Casc Logistics Plc. will be in a position to plan for the future and hence, ensure that they meet their financial objectives, as well as their overall strategic goals and objectives.
Clark Casc Logistics Plc. is a logistics company that made a loss of £3.2 million at the end of the financial year due to increased costs. The board of directors of Clark Casc Logistics Plc. is reaching out to all the managers to find ways of minimizing the costs for which they are responsible ahead of the compulsory redundancy meeting the next month where incompetent managers will be laid off. Besides, during the meeting, there will be redeployments to the toxic waste sorting division of the company and early retirements, which the board anticipates would reduce the high operating expenses the company is incurring as a result of high salaries and wages.
The company is holding a meeting next week to plan for the next financial year and not to take over the ongoing overspend on expenses for the current fiscal year. In the meeting, the board of directors and the managers of Clark Casc Logistics Plc. need to agree on a total budget of £882,000 for the next financial year. Additionally, the board of directors of Clark Casc Logistics Plc. has suggested that Mo will update the figure for the apportionment of the Central Administrative Costs after the meeting, but it is suggested that the figures for this apportionment will be based on the actuals for the current fiscal year.
As such, the board of directors of Clark Casc Logistics Plc. has suggested that this figure be used when preparing the budget for the next financial year. The main concern for the board of directors of Clark Casc Logistics Plc. is the other costs, which are expected to be proportionate based on the actuals for the current financial year of the business.
Other than that, the board of directors of Clark Casc Logistics Plc. has suggested that a 3 % across-the-board wage increase will need to be considered, which was agreed by the trade union in the previous week. In addition to this, the board of directors has suggested that this increment in the wage will apply to all the staff in the loading bay.
Our report will provide the proper recommendations to the board of directors and Chief Executive Officer of Clark Casc Logistics Plc. detailing how we intend to find the necessary savings and achieve the overall loading bay budget of £882,000 in the next financial period. Additionally, the report will provide a detailed explanation of how the managers will allocate the budget to the wages and employers’ national insurance and pension contributions, equipment maintenance, equipment depreciation, buildings maintenance, buildings depreciation, heating and lighting, goods refrigeration, apportionment of the Central Administrative Costs, insurance costs and other costs. We will guide Clark Casc Logistics Plc. on which costs to cut off to ensure costs savings of the business have been achieved and thus, minimizing the losses that the company is currently incurring and achieving the overall loading bay budget of £882,000.
Approach to Drawing Up the Loading Bay Budget
Drawing up a budget involves people’s skills. They comprise listening, negotiation, and numerical skills, which are critical for ensuring that the budget has been properly prepared in line with the goals and objectives of the company (Management Direct, 2020). Drawing up a budget is a dynamic process, which the managers of the organization should consider in their future planning of the business. This will aid in the achievement of the overall strategic goals of the corporation.
Various factors need to be considered when drawing up a budget within a company. Some of these factors include the volume of sales, the available manufacturing plant, the competitive environment, and the number of customers. Studies suggest that there is no point in drawing up a budget that is based on a high volume of sales when in fact the company will not be able to achieve this volume of sales (Management Direct, 2020). For Clark Casc Logistics Plc., the same case applies, and thus, the management should not prepare a budget that is based on a high volume of sales, which they might not be able to achieve at the end of the financial period.
Different approaches are used by different organizations when drawing up a budget. Whichever method is used by the company, the format must be the same for easy reporting and comparison. The main approaches to preparing and drawing up budgets include incremental budgeting and zero-based budgeting. The latter is an approach to budgeting that starts from scratch and considers each cost at the start of each financial year. Here, each cost is analyzed according to the current situation of the organization instead of referring to the budget of the previous financial period.
For incremental budgeting, on the other hand, the budget is based on the actual figures of the previous financial year. As such, this kind of approach takes into account inflation, which may cause costs to rise. For the incremental budgeting approach, the management of Clark Casc Logistics Plc. will be required to assess how far the budget for last year reflected the reality of the company. Hence, the managers of the company will be required to write down the budget, the way it worked for the previous year or the expenditures of that year, and the variance, that is, how far they achieved the budget for that year.
For the loading bay budget, an overall expenditure budget of £882,000 needs to be attained. Since there are previous budgets that have been prepared, the incremental budgeting approach will be used. From the information given, it is said that Mo will update the figure for apportionment of the Central Administrative Costs after the meeting, but it will be based on the actual figures of the current financial year.
As such, it is evident that Clark Casc Logistics Plc. uses the incremental budgeting approach, which will be used when preparing the loading bay budget. Other than that, a 3% across-the-board wage increase will be considered, which applies to all types of staff in the loading bay.
Relevant Calculations to Show that the Budget is Achievable
To prepare the budget, the individual cost items will be apportioned based on the fraction of the actual figures. This is because the incremental budgeting approach considers the actual figures and prepares a budget based on them. From the information given about Clark Casc Logistics Plc., the main costs incurred by the business comprise wages and employers’ national insurance and pension contributions, equipment maintenance, equipment depreciation, buildings maintenance, buildings depreciation, heating and lighting, goods refrigeration, apportionment of the Central Administrative Costs, insurance costs, which were apportioned based on past claims and other costs. The budget calculations for these costs are shown below.
Wages and Employers’ National Insurance and Pension Contributions
Wages∧employer snational insurance∧pension contributions= 279/486 * 882,000 = £506,333.33
Clark Casc Logistics Plc. is expected to incur £506,333.33 in wages and employers’ national insurance and pension contributions in the budget for the next financial year as a result of an increase in the wages of the board, as well as, other staff in the loading bay by 3%.
Equipment Maintenance
Equipment Maintenance = 42/486 * 882,000 = £76,222.22
Clark Casc Logistics Plc. is expected to incur £76,222.22 in equipment maintenance in the next year’s budget, which is an increase from £42,000 in the actual figures of the current year.
Equipment Depreciation
Equipment Depreciation = 37/486 * 882,000 = £67,148.15
Clark Casc Logistics Plc. has budgeted to incur £67,148.15 in equipment depreciation next year.
Buildings Maintenance
Buildings Maintenance = 17/486 * 882,000 = £30,851.85
Clark Casc Logistics Plc. has budget to achieve buildings maintenance of £30,851.85 in the next year’s budget.
Buildings Depreciation
Buildings Depreciation = 28/486 * 882,000 = £50,814.81
Clark Casc Logistics Plc. will be expected to achieve an amount of £50,814.81 in buildings depreciation next year.
Heating and Lighting
Heating and Lighting = 15/486 * 882,000 = £27,222.22
Clark Casc Logistics Plc. will be expected to achieve £27,222.22 in heating and lighting next year as seen in the computation above.
Goods Refrigeration
Goods Refrigeration = 8/486 * 882,000 = £14,518.52
Clark Casc Logistics Plc. will be expected to incur £14,518.52 in goods refrigeration next year.
Apportionment of Central Administrative Costs
Apportionment of Central Administrative Costs = £42,000
It is expected that the apportionment of the Central Administrative Costs of Clark Casc Logistics Plc. will remain the same in the next financial year at £42,000.
Insurance costs- Apportioned Based on Past Claims
Insurance costs = 12/486 * 882,000 = £21,777.78
It is expected that Clark Casc Logistics Plc. will incur £21,777.78 in insurance costs next year, which have been apportioned according to the past claims.
Other costs
Other costs = 6/486 * 882,000 = £10,888.89
It has been budgeted that Clark Casc Logistics Plc. will incur £10,888.89 in other costs next year. From the calculations above, it is evident that the wages and employers’ national insurance and pension contributions have the highest allocations followed by equipment maintenance, whereas other costs have the lowest allocations in the next year’s budget. Using these figures, therefore, the budget for next year will be prepared.
The Proposed Budget with Full Figures
From the analysis above, it is expected that Clark Casc Logistics Plc. will increase its budget for wages and employers’ national insurance and pension contributions from £279,000 to £506,000, equipment maintenance from £42,000 to £76,000 and equipment depreciation from £37,000 to £67,000. Consequently, Clark Casc Logistics Plc. will increase its budget for buildings maintenance from £17,000 to £31,000, buildings depreciation from £28,000 to £51,000 and heating and lighting from £15,000 to £27,000. Moreover, Clark Casc Logistics Plc. will increase its budget for goods refrigeration from £8,000 to £15,000, insurance costs as apportioned based on the past claims from £12,000 to £22,000 and other costs from £6,000 to £11,000. However, the apportionment to Central Administrative Costs will remain constant at £42,000.
From the table shown above, a budget has been prepared for Clark Casc Logistics Plc. for the next financial year. From the budget, it can be seen that the company will be able to achieve total expenditures, tax and dividends of £848,000, which is much lower than the proposed of £882,000, and thus, it is evident that the overall loading bay budget of £882,000 can be achieved.
A Conclusion on the Achievability of the £882,000 Overall Loading Bay Budget
Having reviewed the costs and prepared a budget for the next financial year, it can be said that the overall loading bay budget of £882,000 is achievable. From the analysis, it is evident that an increment in the wages and employers’ national insurance and pension contributions of 3% would be made and the apportionment of the Central Administrative Costs will remain constant at £42,000. Even after making these adjustments, the overall loading bay budget of £882,000 would be achieved by using the incremental budgeting approach since it is suggested that the budget figures would be dependent on the actual figures for the current year.
For Clark Casc Logistics Plc., as a logistics company, the main concern is that the business is making a loss of £3.2 million, and this is mainly attributed to the high costs that the company is experiencing. As such, the board of directors have been in agreement with the managers to reduce the overall loading bay expenditure budget to £882,000. In this way, by cutting down the costs, the company would be able to ensure that they have achieved an increase in profitability, thus improving the financial outlook of the company.
The computations and preparing of the overall loading bay budget suggest that Clark Casc Logistics Plc. will be in a position to achieve the overall budget of £882,000. This will be achieved after proper allocations of the expenditures are made based on the set target of £882,000. Thus, the computations reveal that the company will achieve total expenditures, taxes and dividends of £848,000 in the next financial year after the apportionment of the Central Administrative Costs are put constant at £42,000 and the wages and employers’ national insurance and pension contributions are increased by 3 % for the board of directors and all the staff in the loading bay.
Recommendations on the Next Steps
Based on the above analysis, we recommend the following budget allocations for Clark Casc Logistics Plc. Clark Casc Logistics Plc. can achieve its intended budget for the loading bay by allocating proportionately using the incremental budgeting approach. From the analysis, the management of the company is recommended to allocate approximately £506,000 to the wages and employers’ national insurance and pension contributions after an increment of 3%, approximately £76,000 to equipment maintenance, £67,000 to equipment depreciation and £31,000 to buildings maintenance. In addition to this, the company will be recommended to allocate approximately £51,000 to buildings depreciation, £27,000 to heating and lighting and £15,000 to goods refrigeration.
Conversely, Clark Casc Logistics Plc. will be recommended to allocate roughly £42,000 to the Central Administrative Costs which will be constant from the actual figures of the current year, approximately £22,000 to insurance costs which will be apportioned based on the past claims and around £11,000 to other costs. In total, Clark Casc Logistics Plc. is expected to incur approximately £848,000 in total expenditures, taxes, and dividends. Therefore, it is evident that the business will be able to meet its overall loading bay budget of £882,000.
Reference
Management Direct. (2020). A selection of useful resources: Setting budgets with management direct. Web.