Budget Proposal
When planning budget proposals, one should pay acute attention to the organization’s current financials. Moreover, the success of proposed initiatives depends on the type of budget, income, expenses, and other financial indicators that help predict the proposal’s profitability. Thus, IDS needs to analyze its financial and budgetary considerations and justify the implementation of the budget proposal to predict its feasibility and profitability.
Financial and Budgetary Considerations
When planning a budget proposal, it is vital to rely on financial statements to obtain a more comprehensive picture of the initiative’s feasibility. The financial statements will encompass the expected financial results, cash flows, and financial position. Thus, one can use an income statement, cash flow statement, and balance sheet. They will be used to adjust the costs of proposed changes to the existing financial situation in the company to avoid losses.
Since the budget proposal concerns research and development (R&D) and product diversification, it may substantially impact corporate financial statements. For instance, it can affect both prepaid expenses and accrued expenses. Notably, the comparison of statements in 2019 and 2020 indicates a considerable expense increase, which should be incorporated into planning (USSEC, 2020). The expenses for utilities, such as electricity and water, may rise because developing new systems can take more resources. Furthermore, producing bedside diagnostic systems may require new equipment, and AI-based systems need the IT workforce and equipment’s involvement.
In addition, whether the organization has flexed or fixed budget should be considered. IDS is a for-profit company, so it will not have a fixed budget as it depends on revenues and profits for a particular period. One can assume that if IDS had a fixed budget, the budget proposal for innovations and R&D would have been impossible because this proposition requires a significant amount of money to implement. A fixed budget means having the same sum available each period. The IDS’s flexed budget allows for more independence along with the ability to properly forecast results in planning innovations and diversification (Yao et al., 2022). Moreover, the company’s nature requires it to seek new ways to remain in the market and gain a competitive advantage.
Proposal Justification
The present proposal focuses on boosting innovations and making a profit. Thus, the net profit margin ratio is the most suitable to predict profitability. It shows the profit generated from each dollar of the sold product (Murphy, 2022). The calculations will utilize total revenue ($12,715), cost of sales ($7,442), total operating expenses ($387,612), interest ($77), and taxes ($314,019) for 2019 because there is no information regarding 2020 (USSEC, 2020). These indicators are sufficient to calculate the net profit margin of IDS.
The ratio results have shown -5,477, which suggests the insignificant viability of the present proposal. The key issue is that corporate incomes significantly dropped beginning in 2019 (USSEC, 2020). Probably, the main factor that influenced the change was COVID-19, when demand for lung ventilator devices increased. Given this, one should consider whether it is the right time to initiate innovations and R&D in the company.
In the short-term perspective, the proposal may draw considerable costs and expenses that will also impact the organization’s financials in the long term. Moreover, AI-based diagnostic systems will take much time, so the company may not have sufficient funds to support R&D in the future. Thus, IDS risks having huge debts if it begins the implementation of changes. The strategically sound solution is the involvement of investors who would finance innovative and R&D initiatives. It will mitigate the short-term risks of the current limited budget and help plan the budget for long-term endeavors due to the availability of investments.
Conclusion
Finally, IDS must consider its financial statements before planning the implementation of the proposal, especially given its flexed budget. The net profit margin ratio has been chosen as the most relevant for evaluating the initiative’s profitability. The results have shown poor viability of the budget proposal due to a decrease in the company’s income. Therefore, the appropriate solution is to involve investments that help minimize short-term risks and contribute to R&D and innovations in the long-term perspective.
References
Murphy, C. B. (2022). What is net profit margin? Formula for calculation and examples. Investopedia. Web.
United States Securities and Exchange Commission. (2020). Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Web.
Yao, Y., Li, J., & Yun, L. (2022). Application of flexible budget based on company profit model: Taking VK’s financial data as an example. Asian Business Research, 7(2), 88-93. Web.