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FINANCIAL CONSULTANT FOR NN LIMITED
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Why have budgetary controls been likened to a system of thermostatic control? This question will be critically analysed and discussed and whether or not it is applicable to budgetary control within an organisation.
Budgets are multipurpose financial plans which can be short term (duration of 1 year), medium term (duration 1-5 years) or long term (master budget, duration 5-10 years) and show financial implications of business plans and policies which incorporate both financial and non-financial factors for future activities of an organisation. A budget encourages management to look ahead and set targets for the organisation in the hopes that forecasting and planning will be able to prevent any future problems. Budgets enable management to hopefully foresee most problems within the company and to better track current finances and the more efficient allocation of money to different areas of a business and whether a profit or loss might be incurred.
Effective budgetary control is the serious implementation of challenging yet realistic targets, goals, and achievements of both financial and non-financial objectives by management with effective leadership and full commitment from the Chief Executive Officer and board throughout the process. A budget officer who will be a senior member of staff to oversee the budget control procedure or strategy and a committee ensures the process of budget control or strategy is being followed properly.
This control system or process as it is often referred to be known as feedback control. As part of the feedback control timely performance reports are produced usually monthly and management compares actual results with the budgeted figures aimed at particular areas of the business. The budget officer will look at the difference which is called a variance which can either be a positive or a negative outcome. Then the control officer discusses with the board a corrective action to be implemented. This system is often compared to as a thermostatic control as the actions to be taken are either adverse or favourable which is like turning a thermostat to be warmer (up) or colder (down). This also shows in which direction the budget needs to be flexed.
Variance analysis is usually associated with manufacturing businesses as they tend to use all aspects of variance in practice. Whilst researching variances, it is unrealistic to expect a business to hit their targets precisely each month, quarterly, yearly, and so on. Therefore, there will almost always be a variance and to try and find the reason is sometimes not cost effective.
There are practical guidelines managers should take into consideration in regards to significant and insignificant variances with managers deciding what would be significant or insignificant in their particular budget as it is not a one size fits all situations with the need for flexibility. Significant adverse variances might highlight a serious costly underlying problem within the business. Significant favourable variances are not as serious as adverse ones; however, it shows that the budget is not going according to plan and that targets are set incorrectly. Insignificant variances should be kept for review from time to time as they may be caused by a random action and not necessarily recur again.
Calculate projects T & R and advise which project should be invested in with stated reasons for each of the following: projected cash flows, payback period, accounting rate of return and net present value including any calculations.
3.1.1 PROJECT CASH FLOWS
3.1.1 PAYBACK PERIOD
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