Good Example Of Essay On Budget Planning And Control

Question 1

JCDecaux is the world leader in the business of outdoor advertising. It was established as a private company in France in 1964 by J.C. Decaux to exploit a simple business concept: to provide street furniture for cities such as bus shelters, billboards or information panels in exchange for the right to place commercial advertising on its structures (JCDecaux, 2012 annual report). The concept proved to be successful and today JCDecaux is a public company operating in over 60 countries across the globe. From financial perspective, its business model can be described as follows: upon winning a long term contract (usually for 20-25 years) from city authorities, the company invests heavily in the street infrastructure of the city within first 3-5 years with the purpose to generate enough advertising revenue during the remaining life of the contract to pay for the investments incurred and make expected profit for the company. The foregoing business model of JCDecaux warrants careful budgeting for the following reasons:

Significant capital expenditure requires careful estimation before investment and monitoring in the course of its implementation;

Pursuant to installation of advertising equipment (bus stops, information panels etc) the company needs to ensure that its advertising sales are on track on one hand and that its maintenance costs are under tight control on the other hand.
If the company has been effective in its budget planning, the investment which it has made will be paid off during the life time of the contract, that is enough free cash flow would be generated which would allow to pay loans and dividends to the shareholders. On the other hand, if JCDecaux fails to effectively budget its income and expenditure, the initial investment, which can be very significant for larger cities such as Paris or Sao-Paolo, may fail to pay off. There would be difficulties to pay off loans taken for investment, let alone dividends for the shareholders.

Question 2

Budgets operationalise the longer term strategies of the companies for shorter term period, usually one year (CIMA, 2009, p. 268). The starting point for JCDecaux would be to articulate its strategic objectives for long term period and to specify budgeting procedures in the form of a budget manual. The budget manual sets forth responsibility centers, officers responsible for approving budgets, deadlines, outline of all budgets involved etc.
Budgeting starts with identification of a limiting factor, which is usually sales. However, the specific circumstances of the company dictate that the starting point should be the capital expenditure (investment) budget, because quantities and locations of the street furniture are specified in the contract. After it, based on the quantity of items installed, it would be possible to work out sales budget and operating expenditure budget. Based on that, the purchasing budget and the cash budget are drawn. The latter one is of utmost importance as it projects all cash receipts and payments of the company, however the former is also not to be underestimated as significant amounts of cash may be tied in stocks and working capital (Cunningham et al, 2003).
Finally, all these budgets are integrated into one master budget by finance department and is presented to the relevant management for approval. Following approval, budgets are notified to the relevant departments which are responsible for executing them, e.g. sales budget would be communicated to sales department etc.

Question 3

Once a budget process has been established in the beginning, the company may use incremental budgeting technique for the future periods. The essence of this method is to base next year’s budget on the current year’s actual results with allowance for estimated growth and inflation (Atrill and McLaney, 2009, p. 102). The advantage of this method is that it can be done relatively quickly with minimum efforts and time consumption from the departments concerned. It is advised to follow this procedure, if sustaining the status quo is desirable, meaning that business as it is effective and meets the business objectives. However, the main problem with this approach is that it allows for past inefficiencies to remain in the budget. Therefore, if things start going into unwanted direction, this methodology may prove counter-effective. In such a case a zero based budgeting would be recommended for JCDecaux to use for its budgeting processes. Zero based budgeting requites each cost item to be justified as if the business starts from scratch in the budgeted period. This approach makes it possible to identify and remove wasteful spending from the system. The major problem with Zero based budgeting is that it requires a lot of management efforts and time.

Question 4

Let us assume that the company has significant budget overruns, that is actual spending is well in excess of its budgeted amounts. First of all, it management should analyze the budget variance report showing all deviations and focus on most critical areas. The action plan could be as follows:
The first this is to understand what is going on and what the reasons for overspending are. It is important to remember that costs are just outputs and it is necessary to get insight into what causes the costs to exceed the targets.

One technique that could be used for this purpose is Activity Based Budgeting.

The Activity Based Budgeting seeks to identify activities which cause the costs. After activities are identified, it would be clear where the problems are. Hope (2006, p. 118) argues that in such a process a number of non-value adding processes could be identified.
It can then be decided whether the activities which cause excesses can be curtailed or alternative solutions (such as automation or outsourcing) can be considered and agreed upon.
Finance department should feed in the proposed solutions into the budgeting models to see whether changes result in meeting the targets, which is called feed-forward control.

References

Atrill P. & McLaney, E. (2009) Management Accounting for Decision Makers (6th ed.). UK:
Pearson Education. 
CIMA (2009) Management Accounting: Performance Management. UK: BPP Professional
Education.
Cunningham, J. E., Fiume, O. J., & Adams, E. (2003). Real numbers: Management
accounting in a lean organization. Durham, NC: Managing Times Press.
Hope, J. (2006). Reinventing the CFO. How Financial Managers Can Transform Their Roles
and Add G reater Value. Harvard Business School Press, Boston.
JCDecaux (2013) Annual report 2012 [Online]. Available from:
http://www.jcdecaux.com/en/The-JCDecaux-group/Annual-Report [Accessed: March 9, 2015].