About the company
Tootsie Roll Industries is based in the United States and it deals with the production of food items that have high levels of Carbohydrates and sugar. The company was established in 1896 and it operates in the confectionery industry. Currently, it is a public company that trades on the New York Stock Exchange with the ticker symbol TR.
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Currently, the shares of the company are trading at $31.86 per share. Further, the company has a market capitalization of 2.0 billion. At the end of the year 2014, the total revenue of the company amounted to $544 million while the operating income totaled to $84 million, an equivalent of 15.4% of sales. The net income for the year amounted to $63 million. The total assets at the end of the year 2014 amounted to $910 million, while liabilities and equity amounted to $220 million and $691 million.
A review of the balance sheet shows that the company has more equity than debt in the capital structure. A review of the trend of the performance of the company over the years shows that the performance of the company has improved. Finally, the company has engaged more than 2000 employees. The paper seeks to analyze various aspects of budgeting for Tootsie Roll Industries.
Reasons for budgeting
There are a number of reasons why companies need to prepare and manage budgets on a period basis. The first reason is that budgets enable the management to plan for the future (Brigham & Michael, 2009). In this case, the budget aids the management in developing a direction for the entity. It also facilitates the development of future policies for the organization. Also under planning, budgets aid management in planning for problems that might arise in the future.
Finally, as a way of planning for the organization, budgets helps the management in setting standards that can control the use of available resources (Collier, 2010). The second reason why companies need to prepare budget is that it aids in delivering important information on matters that deal with the capabilities of resources. An example is that a cash budget gives information on the ability of the company to generate revenue and pay for expenses.
Further, a budget encourages coordination across various departments and units because the plan for a specific period is communicated to various employees (Brigham & Michael, 2009). This contributes to the achievement of the overall objective of the entity. Thus, if the company carries out proper budgeting, then it serves as an effective tool for planning and controlling (Brigham & Michael, 2009).
The positive outcomes that are likely to be reported when budgets are carried out effectively are reduced costs and improved profits. This is based on the fact that budgets aids in effective management of costs and this has a positive impact on the performance of the company. As a result, the elements in the budget will be equivocal to achievement of the intentions of a company. Besides, the company will be able to track different budget performance matrices over a specified period of time.
The negative outcomes that are likely to be reported when budgets are carried out effectively are resource misuse and inability to track different parameters of performance of a specified period in a company. If budgeting is not done effectively, then there is likely to be misuse of resources since budget controls resource allocation and use in a company (Graham, Smart, & Meggison, 2010).
This will lead to poor working capital management and low level of sales. This may translate into poor performance since misusing resources cannot translate into efficiency. Therefore, it is important for the company to carry out planning for all financial years.
The company needs to come up with a comprehensive budget plan because it is involved in the production and sale of its products. Therefore, the high-level budget will capture the two aspects of the business and it gives strict control on spending (Brigham & Michael, 2009). Thus, the high-level budget plan for the company is summarized in the table below.
The plan above brings together all the aspects of the organization in one budget. It ensures that several employees are involved in planning and control of resources.
Budget preparation goes through four distinct phases. The first phase is budget preparation. This stage is quite critical because the resources available in the organization are reviewed to ascertain whether they can enable the company to achieve the desired goals and objectives (Brigham & Michael, 2009).
The phase is the approval of the budget while the third phase is executing the budget. The final stage is evaluating the budget. This stage ensures that resources are spent in accordance with the budget (Atrill, 2009). All these phases are critical because they ensure that the budgeting process is successful.
Methods and techniques of managing budgets
Methods managing budgets
The first technique of managing budgets is by preparing flexible budgets. These are budget relationships that can be adjusted to various levels of activities. This technique is suitable for performance management (Atrill, 2009). The second technique is by managing variances by exception. These variances can cause significant variations on the results. Managing variances is a technique that ensures that the company stays within the budget (Hansen, Mowen, & Guan, 2009).
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Techniques of managing budgets
The first method of managing budget is drawing parallel budgets from which the most effective budget is picked. This method is necessary in minimize possible risks as a result of dynamics that might affect projections in a single fixed budget (Graham, Smart, & Meggison, 2010). The second method of managing budgets is creating a matrix for balancing the actual and projected figures to ensure that the funds allocated for each function are spent within the acceptable degree of variation (Atrill, 2009).
Action plan to resolve budget misalignment
Flexibility is often compromised in companies facing uncertainty. In real sense, there should be a balancing system that is critical in improving leadership skills, evaluation skills, promoting creativity, and tracking goals (Graham, Smart, & Meggison, 2010).
Therefore, the basis for flexibility implementation should function on a comprehensive analysis of how budget monitors any change in variance from expected outcome to facilitate work-life balance in a project (Brigham & Michael, 2009). The concept should remain relevant even during economic downturn since an ideal tracker has a moderator within Pareto efficiency matrix (Arnold, 2008).
Recommendations for resolving budget misalignments
Managing variances by exception
This is achieved through variance analysis to resolve budget misalignment. Variance analysis focuses on the difference between the actual and budgeted amounts. It analyzes the total variance between standard and actual result (Graham, Smart, & Meggison, 2010). Variances can either be favorable or unfavorable.
Variance analysis has a number of advantages. First, it helps in performance management. This is because the management uses results of variance analysis to measure performance against expected results. Secondly, variance analysis improves responsible accounting.
Finally, variance analysis encourages management by exemption, that is, management puts a lot of emphasis on areas with adverse variances (Atrill, 2009). The rationale for this technique is the ability to track the variances that might be detected in budget implementation to ensure that these variations do not affect the overall outcome (Brigham & Michael, 2009).
Preparing flexible budgets
In line with the main objective to determine the forecast density closest to actual value, it is of essence to resonate upon the principles of relative performance of different competing forecast densities as part of the cost reduction system. In computing this, higher scores are given more priority since they are prone to give positive values. Besides, this model distributes higher probability to values observed (Graham, Smart, & Meggison, 2010).
From the different densities realized and those forecasted, the sequences of observed results on densities of return are compared from the base line of an average score. Subsequently, in line with the accuracy of equal forecast, the loss differential is expected to be minimal (Brigham & Michael, 2009).
The rationale for this technique is that the parameters and variables used are aligned to ensure that threshold on model-independent is achieved within competing parameters (Graham, Smart, & Meggison, 2010). Thus, this is the most appropriate benchmarking for managing a budget.
Arnold, G. (2008). Corporate financial management. New York, NY: Pearson Publishers.
Atrill, P. (2009). Financial management for decision makers. New York, NY: Pearson Publishers.
Brigham, E., & Michael, J. (2009). Financial management theory and practice. New York, NY: South-Western Cengage Learning.
Collier, P. (2010). Accounting for managers. New York, NY: John Wiley & Sons.
Graham, J., Smart, S., & Meggison, W. (2010). Corporate finance: linking theory to what companies do. New York, NY: Cengage Learning.
Hansen, R., Mowen, M., & Guan, L. (2009). Cost management: accounting & control. New York, NY: South Western Cengage Learning.