Exploring Business Activity Assignment
Introduction: In this report I will be speaking about how managing the resources of an organisation and effective budgetary control can lead to improved performance of a business.
Findings/ Main Body: As I have talked about with you before, managing the resources of an organisation and looking closely at its budgetary control is absolutely vital in business. It improves performance over every department and gives the business management team a clear view on where they can expand and develop in the future.
Every public limited company that allows people to buy shares within their business must publish their accounts so that investors can see how well they are doing and judge whether or not to buy their shares on the stock exchange. All the top dog companies have a clear view on their resources and budgets; this is evident from Tesco who have lists of all their resources and a clear cash flow all on one financial statement. They made profits of over £2 billion in 2005 and this tells us that managing budgets and resources well really does improve businesses performance.
Managing resources of an organisation improves performance as it gives more cash flow, providing you cut back on unnecessary resources; this gives more to re-invest or to pay off liabilities. E.g. If John Lewis had £4600 of current assets and £3600 of current liabilities then they would have a working capital of £1000. By managing the resources and cutting back on waste products, such as recycling paper, they can decrease the liabilities figure from £3600 to £3200. This gives them £400 more working capital and add that to the previous amount of £1000 you get £1400 working capital. Working capital is essential to keep businesses active and trading, they need it to pay bills and avoid debt. Managing your resources and budgets well will increase your work capital and therefore increase the stability of your business.
Managing the budgetary control effectively helps improve the performance of an organisation as, if you can mark up the break even point on a chart of business, you can identify the point where your business has sold enough products or service in order to cover your expenses. This is crucial information for any business trying to avoid losses, knowing the point that you break even is a good target to reach and keeps everyone in your organisation focused and therefore improves performance. Furthermore, the margin of safety can also be found in order to allow the business to work out the amount of units by which sales can fall before the business starts to make a loss.
This improves the businesses performance in hard times such as the current recession as the management team know how much security they have until they start making a loss. An example of the margin of safety could be when John Lewis has 65 units and a break even point of 50 units. This gives them 15 units of lee way until they start making a loss.
If you was to look at the break even point in more detail you could increase the point where your business breaks even by increasing the price of products. You would also have to, in return, consider how this will effect the sales figures and whether your business will still be selling. A wise option is to increase the price when the demand is high and the supply is low, this way you are virtually guaranteed on increasing the break even point and widening the margin of safety with the high level of sales.
Another example of how managing the budgetary control and resources within a business helps improve performance is the effect of changes in fixed costs. When running a business there is fixed costs that are always the same, these include costs such as rent, insurance and road tax. Knowing the changes of your ‘fixed’ costs could save a lot of time and keep a more clear financial statement and management decisions. Say for example the government orders all insurance on cars to increase by 15%, this used to be a fixed cost however on the odd occasion it can change. Applying close attention to changes within ‘fixed’ costs can be crucial and will improve the performance of management decisions in the future as you have valid data to hand.
The pricing in times like the recession for rent could always be changing and product prices can go up or down according to competitors within the marketing environment, using invalid information for predictions on what will happen with the business is suicidal and managing resources and budgets can cover this problem and in turn improve the companies performance by making accurate marketing decisions that will benefit the company.
Also, in any recession businesses need to insure their safety by keeping reserves from the cash flow cycle for emergencies. An emergency could render anything from a downturn in the market to an offensive attack on your business premises, keeping reservations will help soften the effects of these situations. Business analysts recommend that reserves should be maintained which will allow the business to continue for at least three months in the event of an emergency. Also having a high liquidity figure helps, this is the ability to turn assets or stock into cash to be able to pay bills. Making reservations and emergency funds will improve performance in the long run in poor economic times and help see your business through, giving each department a limited budget to handle and giving limits on resources.
The importance of costs and budgets is extremely high within any organisation that wants to do well. The advantages of managing your costs and budgets are that it is easier to have a constant cash flow, cash flow is vitally important within all businesses as it helps pay the bills whilst you await debtors to pay for your services. Another advantage of managing your costs and budgets is that it helps you avoid getting into debt as you always know how much you have to spend and whether you can afford certain assets or advertisements.
If the costs and budgets are not monitored the company could be working at a loss, with the information in hand that you are losing money and not even making enough profit to cover costs you could, as a result, start dropping staff and maybe selling assets such as computers and vehicles that are, not necessarily not needed, but aren’t useful without the staff operating them. The business value will eventually decrease significantly as a result of an unmonitored financial system not checking the costs and budgets effectively.
A good real life example of a company that manages its costs well is John Lewis. They manage their costs and budgets effectively by having a whole department of finance and numerous staff working under their command. Their job is to look at all the costs and budgets of the store that they are allocated to and to see whether an investment of new advertising or a new product is financially viable with their budget. This way they can avoid spending large amounts of money that the company doesn’t have. Also, it is clear that they manage their costs well as their financial statement for the half year leading up to August 2009 saw a profit of £57 million profit.
Another real life example of a company that doesn’t manage their costs well is the Lehman Brothers. I’m sure you have heard all about them on the news back in 2008 when they declared bankruptcy from investment banking. Their filing of being bankrupt was the biggest in U.S. history. They didn’t manage their costs well as they invested huge amounts of money in business that didn’t get a good return and also lost money by giving out loans to customers with poor credit ratings in order to bring in more money overall. They received little return on their loans as people couldn’t afford to pay them back, this in turn left a huge gap in their finance and is evidence that they should have managed their costs better by only lending to people with decent credit ratings.
Conclusions: To sum up this and all the previous reports, the management of costs, budgets and resources all work co-ordinately to improve overall business performance. This is done in many ways but mainly in that it increases the break even point, the margin of safety and can reduce overheads significantly, this all results to greater profits which is the core of all non-charitable organisations therefore making the management of resources and budgets vitally important.
Recommendation: My recommendation to anyone who starts up a business is to make sure that right from the start you have an effective budgetary control and a well managed resource department. Make sure that you stay up to date with your marketing environment that is relevant to your niche market to ensure you gather correct information in order to make accurate marketing decisions. Any business that doesn’t have a good budgetary and resource control system is deemed to fail sooner or later and, if this is relevant to you, then I would re-design your business before it starts making a gaping loss and you’re left wondering why, without any accurate information to go by.