The main objective of this memo to the shareholders of Donaldson Limited is to provide an explanation for the benefits of budget preparation as well as describe the projected cash position for the company during the year ending 31st March 2017. Finally, this memo will provide an insight as to how the company can improve its overall monthly cash position and balances over the projected period.
Benefits of Budget Preparation
The main benefit of budget preparation is that budgets facilitate the overall planning operations for the company. The implication is that through budgeting, the company will be able to project its sales revenue, cash flows including cash requirements as well as the projected financial performance for the firm (Wood 2013; Kaplan 2015). In addition, budgeting enhances and promotes coordination among the various functional departments within a firm. This implies that through budgeting all the relevant departmental units in the organization are likely to work harmoniously towards the same organizational goal. Budgeting also enables the organization to communicate targets and plans to the various functional managers in the organization. Budgeting also acts as motivation towards the attainment of the organizational goals especially if the lower level managers have participated in the budget formulation. Moreover, budgeting also facilitates the controlling of organizational activities towards a common organizational goal. Finally, budgeting facilitates the performance evaluation of managers based on the comparison of their actual performance against the budget (Kaplan & Norton 2011; Kaplan & Norton 2013).
Evaluation of the Company’s Budgeted Cash Position for the Year
In this case, despite the fact that during the early months of the years, the company’s cash position is not expected to be impressive, the company’s cash position is expected to improve as from January of the year 2017. This is because, according to the projections, the company is likely to have a cash deficit position during the period June-December 2016. However, as from January 2017, the company’s cash position is expected to improve due to the cash surplus position that is expected during the period January-May 2017. In essence, the cash deficit position that is expected during the early months of the year is due to the fact that a significant proportion of the company’s cash will be tied to debtors.
Evaluation of the Ways the Company’s Monthly Cash Balance could be Improved
The company’s monthly cash balances can be easily improved by increasing the amount of sales revenue for each month of the year. This can be made possible by putting in place a robust marketing campaign, which will be expected to drive the company’s monthly sales. In addition, the company’s monthly cash balance can also be improved by putting in place a tight credit policy, which will have the effect of reducing the credit period from the current two (2) months to one (1) month. This will reduce the amount of cash balances that are tied to the company’s debtors. The company can also improve its monthly cash balances by negotiating for an increase in the purchases payment period. In this case, the company could negotiate for the purchases payment period to be increased from one month to two months. Finally, the company can also improve its monthly cash balances by managing its operating expenses effectively. In this case, the company can manage its overhead expenses to prevent overspending on the company’s overhead expenditures (Drury 2013; Drury 2014).
Drury, C 2013, Management and cost accounting, BookPower Publishers, London.
Drury, C 2014, Management and cost accounting, BookPower Publishers, London.
Kaplan 2015, Management accounting, Wiley Publishers, London.
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Kaplan, RS & Norton, DP 2011, The strategy focused organization, McGraw Hill Publishers, London. Wood, F 2013, Business accounting, McGraw Hill Publishers, London.