The Coca-Cola Company | EssayIvy.com

Cover Page

Introduction

The Coca-Cola Company is one of the largest and most reputable companies in the

world that manufactures beverage products. It is the global market leader in producing

distinguished soft drinks, with shops almost in every nation. The company has an extensive

asset base, and highly skilled workforce, especially in its research and product development

department. The highly qualified human resources are the sources of the competitive

advantage to the company since it enables the company to produce unmatched products in

the market and in the provision of strategies that have always made the group ahead of the

pack, compared to its rivals. The Coca-Cola Company, UK, dominates the beverages market

in the UK. Therefore it has a significant contribution towards the reaction of the prices by

other companies which offer substitute products in the UK. Being a market leader, the

company enjoys a significant market share, a large customer base, and a more substantial

portion of the revenue generated by the beverages industry. The company's mission is to tap

all the potential soft drink market gaps in the world and establish its operations in most

nations of the world, by selling its brand through offering quality products that meet the

customer's tastes and preferences.

The company has invested in research and development and has, therefore, a variety

of products that it gives it a competitive advantage. Having a global footprint has enabled

the company has allowed the company to diversify its economic and financial risks.

ENVIRONMENTAL ANALYSIS

The Coca-Cola Company is more exposed to the external environment as opposed to

the internal environment due to it's the nature of its operations which are globally based. It is

therefore exposed to the political, economic, technical, legal, as well as the cultural and the

social, cultural factors.

Political environment

The company is exposed to various political situations due to its global presence.

The political environment in the UK is one of the most favorable environments that give the

company room for conducting its operations, and hence, it maximizes the sales and the

market gaps available to it.

The economic environment

The economic environment in the of the company is a little bit volatile because it has

operations in various economies all over the world. The company faces a lot of foreign

exchange risk due to the multicurrency operations that it holds. Specifically, the Coca-Cola

Company in the UK has one of the best economic environments of operation. The economic

environment in the UK is stable, and companies can operate efficiently to maximize their

returns.

Social and cultural environment

Various cultures in the world expose the company to a macro environment beyond

its control. However, most parts of the world have the culture of using the soft drinks when

there is there are celebrations and other types of ceremonies. The Coca-Cola Company being

one of the companies that produce distinguished brands of beverages, it can make a lot of

sales during festive seasons and times when there are celebrations.

Technological environment

The Coca-Cola Company use a high level of technology to manufacture its products

and sell its products. Use of very high levels of gives it a competitive advantage over its

competitors. Specifically, the UK company is among the companies in the United Kingdom

that use the highest levels of technology, and hence, it is better placed to compete against

other companies in the UK, which are its rivals, or that offer substitute beverage.

Technology also enables the company to have the highest levels of efficiency and

consequently, stay ahead of other companies.

Legal environment

The Coca-Cola Company's legal cases are many due to the legal setting that it is

exposed to, all over the world. The changes that also legislations all the world, and the need

to comply with new rules makes it have a lot of legal case with which it has to comply with.

ANALYSIS OF FINANCIAL OF FINANCIAL RATIOS

The analysis of the financial ratios of the Coca-Cola Company in the UK is based on

its financial statements for the years ended 2015 and 2016. These ratios will assist the

company in the control of its operations, and costs, as well as help the current and

prospective investors in making investment decisions. (The financial statements are attached

to this assignment).

The current ratio

2016 2015

Current ratio = Current assets/current liabilities = 1393/925

1184/772

1.506:1 1.534:1

The current ratio of the companies shows no significant changes during the year 2016

and 2017. However, the current ratios of the two companies show that the company's current

assets that it is holding are greater than the current liabilities. The situation of the current

ratio may not be the best, compared to the recommended industry ratio of 1:1. Looking at

these ratios, they are far much higher than what would be most appropriate for the company.

They indicate a situation where the company is investing more in the current assets and

hence tying a lot of funds, in current assets which can be used by the company to make

short-term investments which enable it to earn more profit than it is currently making. The

company should think of striking a balance between the current assets such every unit of

currency of the current asset matches every unit of currency of the current liabilities. In this

way, it will be possible for the company to meet its current liability obligations as they fall

due.

Operating profit/margin ratio

The operating profit ratio enables the company to decide the best way in which it can

control the cost of sales, and other operating expense, before taxation and interest costs. The

operating profit/margin ratio of the Coca-Cola Company UK for the two years is determined

as follows (operating profit/net sales)*100%

2016

2015

(872/3005)*100% = 29.01%

(854/2704)*100% = 31.58%

The operating profit ratio of the two financial years of the two companies shows that

the operating profit ratio for the year 2016 has slightly dropped by over 1.57 percent. It is an

indication that either the company’s cost of sales went up, as compared or the operating

expenses also increased. These could be signals of expected inflation, where the company

should start preparing in advance to cope with the expected economic times. However, the

operating ratios for the year 2016, in the overall beverages industry in the UK, is 28.47%,

which is an indication that the Coca-Cola company is still performing well compared to the

average in which the firms in the industry are making.

Gearing ratio

The gearing ratio measures the level at which a company is financed by the creditors

and specifically, the long-term debt. It indicated the level at which the company has been

funded using debt. The gearing ratio enables the business as well as the potential investors to

determine the proportion of the liability of a company, compared to the equity funds. The

gearing ratio of a group will be useful in determining the financial health of the company. It

can also be used by the potential investors to determine whether a company is likely to go

into a receivership or liquidation, and therefore, it is an essential tool for the evaluation of

the company's financial status.

Gearing ratio is equal to (total debt/ total equity funds).

2016

369/792= 0.4659

292/705= 0.4141

The gearing ratio of the company is falling has deteriorated in the financial year 2016,

as compared to the year 2015. Again, looking at the gearing ratio for the two years, it can be

concluded that the financial health of the company is at a higher risk since the level of debt

is higher than the amount of the funds invested in the company by its members. The trend is

worrying, and it indicates likely scenarios where the company may be dissolved upon the

request by the creditors. It may also be an indication of the company’s poor management

and the need to change the company’s top executives. The commendable gearing ratio for a

firm is a maximum of twenty percent, implying that the company will need to improve its

financial structure to obtain a healthy gearing ratio.

Asset turnover ratio

The asset turnover ratio is useful in determining the return from sales on every unit of

currency invested in the assets of a firm. The asset turnover ratio, assist the current and

potential to know the rate at which every unit of money, their company will invest in assets

is likely to generate the revenue for the company.

Asset turnover ratio = net sales/ net assets

2016

2015

3005/527= 5.702

2704/480= 5.6333

The asset turnover ratio for the year 2016 has improved compared to that of the year

2015. The average turnover ratio for the industry is 4.629. Comparing with the beverage

industry’s ratios, the Coca-Cola Company is performing well regarding the returns that it is

generating the market. The ratios for 2016, implying that for every unit of currency in the

company's assets the company will generate an amount which is five times more.

Interest cover ratio

The interest cover ratio indicates the number of times, in which the profit earned

before interest and tax can repay the interest. The higher the number of times, the better a

firm is, to repay debt, and the lower it is, the riskier it is for the company to indulge itself in

the payment of loans and other financial obligations which have a cost. The cover ratio is

determined as follows:

(Profit before interest and tax/ interest)

2016

2015

874/6= 145.67 times

854/4=213.5

The company seems to be performing well since its operating profit can be used to

repay the finance costs at an estimate of one hundred and forty-six times. However, it is

worth noting that the time's interest coverage ratio has declined compared to the previous

year. Control over the finance costs is required. Otherwise, the trend may deteriorate.

Return on Capital Employed

The return on capital employed compares the amount of the capital employed by a

firm with the firm’s profit before interest and tax. It shows the expected rate of return, in a

case for every unit of currency that the firm uses in its operations.

2016

2015

872/896 = 0.973

854/672 = 1.27

The return on capital employed has declined compared to the previous year. It is an

indication that the company's financial performance is falling. The ROCE industry average

ratios for the same beverages companies is 0.9112. With the Coca-Cola having a ROCE of

0.973, it can be said to be within the limits that are acceptable within the industry. However,

there is need to have control over it, so that it does not deteriorate further.

Part 2

Various sources of finance may be readily available for the company. Given the

capital structure of the company, the level of gearing is beyond the recommended limits, so

if the company was to buy land and buildings worth 10% of its net assets, then the company

may have to seek for other sources of finance. Issuing debentures or other forms of loan

stocks can increase the company's risks to its financial health. The other sources of financing

the 10% increase in the assets of the company will include the issuance of new ordinary

shares, a rights issue, using the company’s reserved profits, or the issuance of preference

shares.

Issuance of the ordinary shares

By the company issuing new ordinary stocks, it will be in a position to raise more

capital through the public. Selling the common stocks through the stock exchange will

enable the company to reduce the gearing ratio. The issuance of ordinary shares by the

Coca-Cola Company, UK, is likely to attract more investors since the company has very

high levels of return in the industry. Apart from having the best levels of performance, the

company offers the best brands and is a market leader in the drinks industry, and is still

developing products that will make it increase its market share in the industry.

Consequently, any announcement of the Coca-Cola Company issuing its ordinary stock, the

majority of the people would be willing to buy the shares of the companies.

Issuance of the rights issue

The company may decide to issue shares to the existing shareholders in the form of

rights issue only since it is not going to affect the voting rights of the current shareholders.

The offering of the rights issue to the shareholders will play the psychological role as the

shareholders will find it worthy to increase their shareholding in the company, with the hope

that when there are capital gains, they are likely to benefit, in case there is need to sell their

shares in the future. The other psychological role that the rights issue, is the fact that it may

enable many of the shareholders to get more dividends, in case the company makes more

profits. The use of the rights issue would work well for the financing of the ten percent of

the net assets as the assets that will be bought are long-term assets, which would require

long-term funding such as the acquisition of shares.

Issuance of the preference shares

The issuance of the preference shares would be prudent. Preference shares are better

sources of finance as they are not debt sources of funding, neither are they equity shares and

therefore, they do contribute to the gearing ratio of the company. They are more like the

ordinary shares, only that they will not carry the voting rights, and they will be given

preference, in case of the company's liquidation. The preference shares will be another better

source of finance, considering that such shares, will be permanent sources, which is required

to finance the long-term assets of the company. In any case, if the preference shares issued

would be redeemable, the company would only repurchase them, and the purchasing back

by the company will be some years after the company has already acquired the assets, and is

generating money form the long-term assets, which it has already bought. It would,

therefore, imply that the company can redeem the shares by creating wealth from the same

assets which it purchased the assets of the company with, and it could be a prudent decision.

However, the use of preference shares would call for the payment of preferred dividends at a

predetermined rate per annum. Even though the company would pay the preferred

dividends, it would still be a better option, since the rate would be a fixed rate, and would

take into account, the inflation rates, as opposed to the acquisition of the loans from the

financial institutions.

Use of the reserved profits of the company

The purchase of the long-term assets which are ten percent worth of the net assets

requires over five million pounds which the company is in a position to buy since the

company already has over seven hundred million pounds in the form of reserves. The use of

company reserves will be a great deal as the company may not incur the implicit sources of

financing that may be associated with the issuance of new sources of finance, such as

advertising costs, legal fees, and contractual agreement fees. The reserves can serve as some

of the best sources of funds, as the financial costs associated with using them is minimal,

compared to other non-equity sources of finance. The only risk that would be related to

using the internal sources of funding is that the capital structure of the company would

change and the gearing ratio of the company would change by even a more substantial

margin, which is financially risky for the company, in case it requires more financing form

the financial institutions. Nevertheless, it would be a good source of finance, mainly if the

issuance of the preference shares, ordinary stocks, and the rights issue would not be possible

for the company.

Debentures/loan stocks

Despite the high gearing ratio of the company, the issuance of debentures can also

be a major and a reliable source of finance. Looking at the interest cover ratio, and the rate

of turnover of the company, the company is still in a position to approach the financial

institutions and even get the funding it requires from them. To secure better sources of

finance, the company will need to prepare a business plan with the projections of the

revenues that it is expecting to generate form the assets, it is going to purchase.

Alternatively, it can issue the secured debentures where it attaches some of the security

worth the amount of loan stock it is willing to acquire from the financial institutions or the

prospective debenture holders. Again, from the perspective of profit and loss of the

company, the company's earnings are enough, for it to present to the financial institutions

and still acquire a loan from the banks.

Considering the gearing ratio of the company, it would be essential to consider the

issuance of debentures as it would be hazardous for Coca-Cola Company considering its

balance sheet. Since the group is highly geared, it is effortless for the company to go into

compulsory liquidation, if the creditors and the debenture holders of the company, request

for it. Also, issuance of debentures comes with a lot of conditions, which may be obstacles

to further investment and expansion opportunities by the company. For instance, when the

company's loan stocks holders may issue a term such as no declaration of the dividends until

their loans are fully paid. Another condition would be, in case the company defaults in

payment loan stocks will automatically convert into the shares ordinary shares for the

company, which has a dilution effect, in the voting power of the shareholders of the

company. More conditions may be issued by the loan stockholders and could be a hindrance

to the expansion programs of the company, and therefore, it should be the last resort for the

company’s finance, at this particular point.

Grants, bailouts, and donations

The Coca-Cola Company may also seek to acquire cost-free sources of funds from

the government and other financial donors, instead of agreeing to abide by certain

conditions. For instance, the government may have that through the bailout it issues to the

company, it employs some persons, in the expansion facilities it is going to create. If the

company finds it appropriate to abide by such a condition, then it may get funding from the

government. At other instances, the government and other donors may be willing to offer

finances to companies, which may be willing to engage in corporate social responsibility

activities such as environmental cleanups, research, and development, or the offering of

internship opportunities to college students among others.

Non-governmental organizations

Most nonprofit organizations may be willing to partner with a company for the sake

of achieving a particular objective such as conducting research, about the beverage

activities, using the company's premises and the company's research staff. In return, such

organizations may offer to expand the company's facilities, and the company can give the

proposal of getting the ten percent of its net assets' expansion. Such sources would be best as

there would be a minimal commitment of the company's resources and the company would

incur the least resources, yet the premises would be left to be owned and possessed by the

company.

Budgeting and its importance in the modern environment.

In the modern business environment, it is not sound to run a company without first

budgeting for its operations. Poor budgeting is known to contribute by a more significant

margin to the downfall of once a thriving company. There we can conclude that effective

budgeting forms the basis of all business accomplishment. A budget is an approximation of

costs and revenues as well as other resources for a particular period and can review over

time. Budgeting is the process of preparing a comprehensive financial breakdown on how

revenue will be generated at specific costs. There are various reasons why an organization

should set a budget.

Budgeting helps a firm or an organization to achieve both long term and short term

goals by accurately projecting the revenues and the expenditures in a specified period. It is

healthy for business because unplanned expenses are minimized. Also, revenues increases

since the pre-determined costs are well utilized.

Every strategy or planning in an organization requires financial resources to

implement. To achieve the set organizational goals and objectives financial resources have

to be committed. To ensure that a strategy works, financial resources will need to be

committed to the plan. To ensure that there the money allocated is spent as required in the

organization, budgets will be one of the essential tools that will need to be used to ensure

that the there is no wastage of the resources which are scarce. Budgeting will are one of the

significant contributors of towards efficiency in the organization. Budgeting, therefore,

ensures that funds are allocated to the plans that support the overall mission of the group.

For instance, if a company want to realize customer satisfaction or even customer care, such

an organization will allocate finances to ensure that a customer care initiative is launched

and is operational.

Capital expenditure is part of a budget that people quickly forget. Capital

expenditure mainly involves the spending of a company's funds, on the long-term assets of

that are expected to generate the primary revenue for the company. For instance, investment

in motor vehicles, plants, and machinery, heavy machinery, and equipment such as costly

conveyor belts. A massive capital outlay is required for such equipment and therefore before

they are even purchased, keen budgeting is required. Again, it is worth noting that if a slight

mistake is made in making expenses of such kind, then it would be a massive loss for the

company, hence the need to prepare the capital budgets. It is vital to understand the

equipment, facilities and machines are subject to depreciation. They are facilities that age

beyond repair. Hence it is essential to allocate resources to replace the aging facilities or

equipment. Also due to dynamics in technology, some equipment or machines become

obsolete or outdated after some time. Therefore it is good for any organization to set funds

for such provisions. If equipment outdated or obsolete over time, the is the need always to

ensure that there is enough money allocated for them, as it will be easy to accumulate for

them as opposed to just acquiring the lump sum money for them as it may not be readily

available.

Organization priorities need to be keenly implemented since these are the strategies

that keep the organization moving. A budget that is well prepared helps the organizational

staff to understand the priorities of the firm and how much amount of money has been

allocated to the particular preferences. Working with budgets may enable the team of the

organization to have an overview of the activities of the group, even before they are

implemented within the organization, the personnel within the organization will be in a

position to determine the amount of money it has committed for various production,

purchasing and production activities. As such, the organization's staff will be able to decide

on what needs to prioritize. For instance, when the budgets are present, the organizational

may be in a position to determine the most appropriate time, when they can request or

demand a salary raise. Again, when a business wants to introduce an entirely new product in

the market, the manager has a responsibility of explaining to the employees how they use

the allocated resources to launch the product. The manager’s explanations will be more

explicit if the budgets for the new product, are tabled in the presence of the employees.

If not controlled, staff will do unnecessarily spending which may even strain or

deplete the financial resources of a firm. When a budget is available, it helps to allocate

funds within the boundaries of the amount required thus eliminating the chances of

unbudgeted spending. The already known form of human behavior is that they will need

more as opposed to less. Consequently, when the managers are allowed to utilize or commit

resources, they will allocate the maximum resources they may think of, without much care

for the organization and in the long run, the firm may be left with nothing to run it. The

presence of budgets for every manager, or any other employee, will make them utilize

money most appropriately, and with a lot of care. This can occur especially where the

persons in positions of responsibility are held accountable for any overspending or wastages

in their areas of responsibility.

Conflicts arise when there is no budgeting since each department want to control the

finances of the firm. The head of the department tend to scramble for more funds, and this

creates an environment of tension. Every manager feels that his office needed more than the

others and thus not healthy for any institution. A budget helps to eradicate such internal wars

since every department is equitably allocated its share. It is essential to bear in mind that

most of the budgets are developed according to the size of a unit within an organization. A

more active department will get more funding as opposed to a division with minimal,

activities. By making the organizational and divisional budgets available, it is effortless to

explain to managers to explain to the divisional managers why their departments are

allocated a particular amount of amount to their satisfaction, with minimal wrangles.

Budgeting also contributes much in establish a profit margin which ensures

continuity and success of business in future. The budget provides resources for reinvesting.

Putting in back of resources ensure that the operations or generation of revenues in the

company will not stop at any point. Budgets enable the organizations to determine the

sources of funds available for financing its projects. When a budget is prepared, it can show

the expected revenue from its operational activities, and the profit the firm expects, from its

income-generating activities. Once the company has been able to establish the amount of

profit margin it is likely to develop, it may use plan on such profits as part of the sources of

funding its planned commercial projects.

A significant motivation is realized amongst employees when they are allowed to

participate in the setting of budgets in various management levels. By involving the

employees in the development of budgets, the employees will own the budgets and will feel

part of the budget. Consequently, they will do everything that is within their ability to ensure

they achieve the elements that are outlined in the budget. The budget will also act as a

source of motivation to the employees especially where it projects substantial profit margins,

in a firm, where the employees are usually awarded bonuses if they achieve the targeted

profits. Such kind of participation helps employees to pay attention to details. It ensures that

the budget is used successfully which in turn increases the productivity of labor and

increases revenues at large.

When a budget is efficiently prepared, the managers can perform their management

roles efficiently and proficiently. The managers feel that it is their responsibility to achieve a

high level of budget efficiency hence will strive toward minimizing costs and maximizing

on outputs. Budgets are some of the performance indicators of the managers responsible for

their implementation. Consequently, when the managers can work with the budgets

allocated to them, they are considered as efficient people who may even deserve more

significant responsibilities. Budgets will, therefore, be a valuable tool for the managers in

the performance of their tasks.

Effective price control and regulation can only be achieved through budgeting. With

a budget, it is possible to determine the cost to charge for a product, since the expenses

required to produce a product can be quickly shown, and hence it is possible to add a

markup on the cost of the product, to determine the optimal price for a product. A budget

can only account for revenue based on the unit price of the products of a company. It is

therefore crucial in determining whether the set price of the commodity will bring losses or

profits or whether the merchandise is overpriced limiting its consumption. With budgets, it

is, therefore, possible to ensure that the firm the firm charges the most optimal prices for its

products, such that it can wage market wars against its rival companies, by charging a lower

price than them or developing products that are unique from those of its competitors.

Therefore budgeting ensures the prices of commodities or the services are well calculated to

strike a balance between both the firm and the consumers.

Reduction of risks of high debts is also possible through budgeting. Many companies

have found themselves spending finances they don’t have. They eventually find themselves

incurring obligations they had not planned for hence increasing the debt ratio of the firm.

However, an adequate budget restrains a company from spending resources it doesn't have.

By using a budget, a business can determine the sources of revenue and how it expects to

spend such sources of funds. Accordingly, the firm will be in a position to decide the way it

can restrain itself to using the only sources of resources available to it, and hence avoid

unplanned for expenditures through borrowing.

An adequate budget has a provision for emergencies. The master budget of an

organization always takes into account the contingencies that may arise within the firm.

When there is a budget for emergencies, the firm’s operations can run smoothly, with

minimal interference, and hence it will be in a position to continue with its core activities of

generating revenues. For example, an expected breakdown of a new machine which is core

to productivity. If such a machine is it is not replaced or repaired, the operations of the firm

will be brought to a halt. However, when the resources are allocated to emergencies, the

replacement will be done, and services will resume in the company.

Budgeting is crucial and essential to the success of any business or organization.

However, the accrued benefits would not be realized if it is not prepared efficiently and

efficiently. A budget is meant to assist in achieving goals set by the organization. A firm

should, therefore, set goals that are sustainable, measurable and attainable. A budget should

then be prepared in line with the set goals, and such the goals should not strain the budget,

or the budget should not underfund or limit financial resources needed to achieve the goals.

An adequate budget should have room for making adjustments. At times one may

prepare a budget and later realized that there were some mistakes in it. One may recognize

that the essential items or plans were not mapped out well. Such errors do not mean that the

budget was a failure. The solution is to go back to the drawing board and make adjustments

needed to make the budget efficient. When making the budgets, it is always important to

prepare them while leaving allowances that are such that there can be adjustments built on it

if an item was not included, or there is need to factor in, new items that arise, even after the

budget is approved.

An accountant or the finance officer should be realistic in preparing the budget; an

efficient budget should not be based on assumptions or imaginations. It should be based on

observable trends or possible facts. One should not undervalue costs or overrate revenues. It

ensures that there is a balance between the organization strategy and the budget prepared. To

enable the finance to be realistic, the accountant can use some of the methods of coming up

with a budget such as statistical forecasting, engineering method, and the high-low method.

In this way, the finance officer will be in a position to develop a professional budget which

is realistic and meets the professional standards expected of an accountant.

Another critical aspect to consider is the investment needs of an organization. When

a firm is thinking of adding on its investment, it should capture this in its budget to avoid

financial strains in the middle of a fiscal year. Increase in the baseline expenditures like

labor, rates, rents, and bills should also be accommodated. Investments need careful of

committing resources. A budget makes it possible to outline the investment options that the

firm has, and the amount of money required to invest in them. To ensure that the business is

in a position to efficiently invest in the project without hurdles, the company can prepare the

budgets and use such budgets to ensure that the project is not stalled.

Approaches to Budgeting

Incremental budgeting

It is an approach where the previous year's budget is used in developing the budget

for the following year. The aspects captured are the overall market growth, inflationary

increases, and salary increment. An incremental budget is designed after reviewing budgets

prepared for the previous year, and making changes to them to come up with the new

budget, that reflects suits the present situations for the firm. It is easy to implement though it

predicts inflations and encourages spending of all resources allocated to departments to get

an increase the following year.

Zero-based budgeting

It is an approach that assumes that the budget is set at zero at the start of the year for

every activity. The budget for each fiscal year is prepared independently of the previous

budgets developed and focuses on the expected events of the fiscal year at hand. All

expenses should be warranted on a cost-benefit basis. It is an attitude that allows effective

and efficient allocation of resources and ensures every expenditure results into revenue.

However, it requires a lot of time and energy to prepare an analysis of costs and benefits.

Base budgeting

Base budgeting is a concept where the initial budget is prepared in such a manner

that the allocations will be enough to run the business as a going concern. Any other

increase in expenditure should be warranted on a cost-benefit breakdown. The base

budgeting mostly depends on the intuition of the person preparing the budgets as the person

will have the experience to determine how much each activity in the organization requires so

that sufficient allocation is made for the budgeted activity. It does not require much effort to

prepare, but there is complexity in deciding how much is enough.

Activity-based budgeting

Activity-based budgeting assumes that costs in business are generated by

activities, and the aim should be to control the cost drivers in those events. The value of a

unit in each operation is determined as well as the demand; then a budgeted cost is designed

for each activity against the number of units. The higher the events consuming money, in

operation, the higher the allocated funds. It is essential in analysis cost behaviors and helps

focus on customer pricing. The most significant challenge is that it requires much effort to

prepare hence tedious.

Kaizen budgeting

Kaizen budgeting is a method where costs are assumed to improve every year; the

values are then incorporated at the beginning of the year. Analysis of performance and cost

minimization can be done quickly. Also, it seems to not only deliver on numbers but also on

overall improvements. The Kaizen budget focuses on quality, as opposed to quantity, in

areas such as the learning curves, and the efficiencies of the workers. It will focus on the

improvements that have been made, such that it is possible to work on tasks quickly.

Disadvantages of budgeting

The process of budgeting is not based on accurate science but instead on

estimations. Estimates are not always reliable, and happenings shortly may change the

budget plans. Budgets may fail if the management and the employees are not committed to

its execution since its success is dependent on the effort and co-operation of all staff in a

firm.

When a project is almost complete, and the employees realize there are still many

resources left on the budget, they may misuse such finances to ensure that all funds are used

up. Budgeting as a process consumes time to prepare; when the expectations of the firm are

not met, most of the employees tend to shift the blame to the budget.

Types of budgets

There is a variety of budgets that a firm can prepare in measuring its expenditure

and again develop effective policies and strategies to add value to their assets as well as

revenues.

The master budget

The master budget is a collection of organization's departmental budgets that are

designed to portray a complete picture of the firms' financial position and strength. It is a

type that is mostly used by large or multinational companies. The budget includes elements

such as assets, sales, operating expenditures, comprehensive incomes and capital

expenditures. It helps organizations to ascertain objectives and assess general performance

at every cost center.

In forecasting and analyzing the projected revenues and expenditures over a period,

the best budget to apply is the operating budget. Such budgets are prepared on a monthly or

weekly basis, although some firms make them on a yearly basis. Essential aspects captured

in such a budget are manufacturing costs, overheads, material costs, labor costs,

administrative expenditures, and sales. It helps the management to compare the reports and

ascertain whether the firm is extravagance on supplies.

The cash flow budget

Another budget that a firm must need to prepare is the cash flow budget. It is used in

projecting the rate of recurrence of cash in and out of the company within a particular

period. It helps managers to understand whether the firm is intelligently utilizing its money.

The accounts applied to such a budget are the account payables and the accounts

receivables. The company uses the budget to determine whether it has enough cash to

continue operating, whether the money is used productively and whether the company is in a

position to generate cash in future.

The financial budget

Another vital budget is the financial budget which is used as a policy to manage the

financial flows and investments of the firm. The significant aspects are the cash flows,

revenues, expenditures, and assets of the business. It reveals the financial strength of a

company and exhibits a broad summary of the relationship between spending and incomes

as per the central operations.

A firm may prepare an adequate budget but fails to implement it. It is thus

paramount to ensure that the prepared budget is achieved with a lot of accuracies. The best

technique of ensuring that a budget is implemented efficiently is dependent on the human

resources. Managers or departmental heads should be wholly engaged in preparing the

budget. It will bring sense to them why such a budget was made. Another important thing is

to have a monitoring team which will evaluate whether what is happening on the ground as

per the budget. The team should report any deviation which should be addressed with

immediate effect to avoid strains or miscalculations that could arise from the budget. If a

budget is prepared and implemented effectively and efficiently, then the success of a firm is

guaranteed.

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