In order to ensure the solvency of a firm, financial management is essential. Financial management involves the planning and control of a company’s working capital to ensure that it remains sufficient for the company’s activities. A cash budget is the planning tool that gives guidelines and enables the management to forecast its future needs, maintain a good cash balance and to control its expenditures. It is therefore an effective tool for the long-term planning in any company to ensure that planning and long-term financing is enabled.
Selection of the article
Due to the economic recession that took place between mid 2007 and 2009, different organization’s economic plans were affected. This was due to inflation and shortages of finances amidst increasing prices of raw material and reduced consumption by American consumers became insufficient. Amidst recession, accurate budgetary planning, forecasting and timely follow-ups of budgets became a waste of time and resources (O’Sullivan, 2010). The article’s ability to highlight the differing views on importance of budgets as a planning and forecasting tool is the main reason for its review. This article provides different dimensions on the relevance of strict adherence to budgetary plans that gives guidelines on how a company’s cash and capital balances should be maintained in a specific period.
The article is also helpful since it gives insights into the changing budgetary forecasting taken by different financial companies lately. This is achieved by highlighting views from different financial consultants and business owners like Steve Player, founder of the Player Group, Kurt Kuehn, Chief Finance Officer of UPS, Lisa Signori, Director of Finance for the City of Boston, and Janice DiPietro the National Managing Director of Tatum. These finance experts give information that is both relevant and helpful to understand the new trends that budgeting is taking. This article is therefore educative and a valuable revelation on the new practices of making cash budgets and forecasts that do not restrict the company to strict adherence.
Significant business and personal financial issue covered in the article
The article gives information on how companies can review their budgeting plans in order to make budgets that are flexible enough to remain relevant during harsh economic times. The article identifies that many companies have constantly improvised work-arounds due to the failure of budgets to forecast future market changes. In the last two years, sales for major companies fell considerably while the market share decreased. These unexpected events changed the spending levels for many companies, which neither was nor forecasted in the cash plans. The article therefore brings into context different practices that can be integrated into cash budgets to achieve a more flexible approach to forecasting of future changes in cash and capital needs of a company. Although the approaches adopted by this article can be termed as replacing the traditional cash budget with liberalized financial forecasts, the article proposes the integration of the two. However, reliance on the budget as the accurate and predictable plan should be minimized due to its shortcomings.
The article reviews sentiments from different finance experts who give a further insight on the new approach of planning. According to the article, cash budgeting and forecasting is a team effort, which should involve all internal stakeholders to ensure they value the importance of a budget. The article offers advice to firms on the importance of pushing budget making into the rest of the organization in order to guide the company into financial production. By collecting data from interviews with different companies, the article questions the need for sandbagged estimates that are unrealistic. Growth estimates and cash needs shown by cash budgets and other financial predictions are unattainable or underestimated in the pursuant of the companies’ financial goals.
The writer introduces the collection of outside data in budget making. Previously, data for cash budgets has been primarily obtained from past budgets, historical data and information from the sales department. However, information from consumers who have been directly affected by recession is important to ensure that the cash budget estimates are realizable using the current market. The article also introduces compensations to workers who have been frustrated by the failure of the company’s cash budget to reach their financial and employment expectations.
New information and insight gained from the article
The article has provided new information on how to revise the traditional cash budgets that are obsessive on creating accurate plans and forecast. The article has introduced the flexible financial plans that focus more on operating leverage rather than fixed budgets. Different financial consultants interviewed in the article recommend companies to adjust the annual costs to declining revenues to ensure that unpredictable economic imbalances do not cause shortages in cash. The article provides a financial insight on the need to adopt financial forecasts that focus on high numbers than individual line items. This allows the financial management team to take a step back and change different parameters of the forecasts without causing changes to the larger plan. This action is essential especially during unpredictable happenings like economic recession, inflation, stock changes or decreases in sales.
Although cash budgeting making has been attributed as a management function, the article recommends that it should be a team effort. This recommendation is given to companies that make estimates and then impose such estimates on the employees to achieve without subjecting it to their views. Employee’s involvement is important since the budget will act as a tool that pushes the entire organization into a team status towards the achievement of the financial performance in the budget. By reading this article, additional insight on the importance of relevant and actual data for budget making was obtained. The article proposes that the financial department should collect data from news reports, state and federal tax data, customer incomes and past financial data on the company to analyze future cash needs and expenditures.
Usefulness of the new information in the future
Future collapse of financial budgets due to unpredictable events like economic recession, inflation and sales changes will be avoided due to adoption of the flexibility towards budgetary estimates. The traditional cash budget, which makes assumptions on revenues and expenditure, has proven to be an unsatisfactory and inaccurate source of future cash flows. However, this will be corrected by adopting flexible budgets that constrain expenses and costs during recession. This helps the company to reduce its operating costs, which boosts its cash reservoir. Information gained from this article is helpful in making cash budgets that have a higher frequency in order to increase the financial department’s ability to make budgetary revisions in any time of the year. This helps to integrate future changes that were not included in the initial cash budget made at the beginning of the year.
The information gained will also be helpful in the future dealings with the company employees towards the achievement of the budgetary estimates. In many cases, budgets are long-term estimates for the company; this means that by integrating employees and all departments in the process of budget making the company is assured of cooperation between the management and the employees to achieve the predicted cash needs. On the other hand, reduction of costs should be adopted by all employees who should be educated on the importance of reducing costs towards maintaining a stable cash balance.
The article provides information on the insufficiencies of the traditional cash budget as an accurate tool for the estimation of future cash uses and needs of the company. It thereafter introduces recommendations in the form of flexible budgets. Additionally it gives advice on the importance of teamwork and data collection during budget making. This is important since it will give the budget the ability to withstand future economic changes that may render the traditional cash budget inadequate.
O’Sullivan, Kate. From Adversity, Better Budgets. Tempted to abandon budgeting altogether, companies have instead taken it to a new level. CFO Magazine. 1st June. 2010. Print.