Analysis Of Directors’ Statements And Participative Vs. Authoritative Style Of Budgeting

Analysis of Directors’ Statements

Sustainability is one of the primary ingredients in planning and formulation of business strategies. Business needs to be stable so that the same can continue operation for years (Agndal & Nilsson, 2009). Management should always make effort to ensure that the business does not shut down the operations. If there is any indication which may pose serious threats to the operational continuity of the business, management should instantly identify the issue, address the matter and assure the restoration. In simple terms, management should always assume that the business will continue for an indefinite period of time and make every necessary effort to ensure that such assumption holds true (Barton & van den Broek, 2011).

In the instant case, the firm, Voyage, seems to have faced the issues of going concern. In this context, statements made by each director may be scrutinised. Points raised by the marketing director indicate that the firm should aim to spend more on advertising and publicity to boost sales. Director is of the opinion that the firm is experiencing acute pressure on price reduction because of a new entrant in the market which sells products to mass, mid and luxury segments. As a result, the business is experiencing loss of market share. However, it may be noted that the aggressive marketing campaign may adversely affect the cash position of the business (Bhimani et al. 2011). On the other hand, the operational director has opined that the unsold stocks may be outdated very quickly in such fiercely competitive and luxury product’s market. Non-saleable inventory may be written off in the income statement which may further reduce the profitability and consequently liquidity position (Cardinaels, 2008).

In this context, data compiled by the finance director may be worth to note. As per the data, the firm has been experiencing a decline in sales for last few years. Such revenue loss is continuous and forms a decreasing trend over the last three years. The figure below shows revenue earned by the brand in last three financial years.

From the above figure, it may be identified that the business has witnessed almost 12% decline in sales in FY2014 and 9% decrease in FY2015. As a result, profit before tax has also reduced substantially.  The figure below shows the fact that the declining trend is sales has contributed towards low-profit margin. In FY2014, profit of Voyage has decreased by 36% as compared to previous year and FY2015 has witnessed almost 87% decline in profitability of the firm. It is a serious matter for concern for the firm as such declining figures indicates the going concern challenges faced by the firm.

Suggestions to Sustain as a Going Concern

Operational data as compiled by the finance director continues to show the adverse situation of the business in terms of loss in market share and also the quality. From the figure below, it may be identified that the number of yachts produced in FY2013 was 50. In FY2014, the same decreased to 47 and further declined to 43 in FY2015. On a similar line, the number of yachts sold to the customers has also reduced substantially during the last three years. In other words, Voyage has lost around 18% customers in FY2014 and further 9% consumers in FY2015.

Due to a continuous loss in market share and unsold stocks piling up in the inventory has contributed towards the increase in book value of inventory on a yearly basis. The figure below shows a continuous increase in book value of inventory. It may be construed that these are the signs of going concern issues. In this context, it may also be noted that the inventory includes yachts rejected by the customers. Therefore, these yachts may be valued at less and written off against the revenue. Such write off will further reduce the profitability and hamper the brand image of the firm.

Furthermore, reduction in sales, corresponding profitability and increase in rejection and also the loss in market share jointly have contributed towards the risk of liquidity. The figure below shows the cash position of the firm is also very dicey. Though Voyage witnessed an increase in liquid cash position in FY2014 to the extent of 25%, the growth story has not continued in FY2015. In the year, the firm has experienced approximately 38% reduction in short term liquidity position.

Based on the above discussion, it may be concluded that the business is running the risk of liquidation. The continuous decline in revenue and profitability signal the risk that the business may have to shut down the operations in the near future. Various financial and operational data substantiate the same. However, business should consider on price reduction and also target the other segments which have not yet been considered by the firm. The reason may be corroborated by the fact that the business has been able to successfully curtail the fixed costs in terms of distribution and also finance and administration. Such effort may be perceived to be a positive outcome of the management strategies in terms of attainment of the desired level of profitability. Given the fact the fixed expenses burden has been lesser than the previous, low production will entail lower contribution per unit of product. However, by doing so, the business may be able to regain the market share which has partially been lost due to new entrant and aggressive pricing strategy followed by the competitor. Gradually, the firm may increase sales by increasing budget on advertising on social media platforms, as suggested by the group managing director. In such way, Voyage will be able to accumulate savings in terms of both profitability and liquidity.

Participative vs. Authoritative Style of Budgeting

Budgeting is one of the most important and critical tasks to be accomplished by the managers of every business organisation (DuhRong?Ruey et al. 2009). However, budgeting may be of two different types as far as preparation of the budget and corresponding methodology followed are concerned. These two types of budgeting are as below:

• Participative Budgeting and
• Authoritative Budgeting

Participative style of budgeting refers to a bottom-up approach for the purpose of preparation of budgets. In other words, this participative style requires the lower level and mid-level management of the firm to be involved in the preparation of budgets for the business. Top level management is often alleged to impose own thoughts and strategies upon the mid and lower level management of the hierarchy (Herrera & Toivanen, 2015). As a result, smooth functioning of the operation of the business gets hampered. Participative style of preparing budgets eliminates such possibility and involves mid and lower level managers to jointly and mutually contribute towards setting goals and objectives, strategising and implementing the budgetary control in order to execute the operation of the business effectively (Li, 2015).

Authoritative style of budgeting, on the other hand, refers to the top-down approach of budgeting. Authoritative budgeting entails top level management involved in the decision making process as to fixing targets, setting organisational goals and objectives, setting benchmarks, monitoring the operational performances of the firm (Lin, 2016). In other words, this style of budget preparation does not provide any room for mid and lower level management of the firm to be involved in the budget preparation process. Primary proposition for authoritative budgeting is that the managerial hierarchy of the business is maintained not only in terms of operation and administration but also in terms of setting aims, identifying gaps and monitoring the follow-up actions (Moyer, 2012).

From the above discussion, it may clearly be construed that the above-mentioned budgeting styles are primarily different because of their preparation styles. The table in the appendix below shows advantages and disadvantages of both types of budgeting styles.

From the above discussion, it may be construed that the budgeting is primarily a management affair. Based on the situational requirements, appropriate style needs to be adopted. As far as Voyage is concerned, the company is facing issues in relation to varied opinions posed by different managers of the business. It may be interesting to note that the views expressed by managers are contradictory to each other, at times. The business is alleged to face issues of going concern. In support of the individual opinion, different managers have presented own sets of ideas. However, it is needless to mention that the situation of the business needs to be analysed from both operational and financial point of view for the purpose of recommendation are the ideal course of action for Voyage. Therefore, participative style needs to be adopted in the instant scenario. Input needs to be collected from finance, production and marketing directors and information need to be summarised to finalise and conclude as to the future course of action for the firm. In other words, bottom-up approach is the need of the hour for Voyage.

Recommendation as to Best Style for Voyage

The case study of Voyage shows that the loss of market share of the firm is primarily attributable to an entry of a new firm in the market and aggressive pricing policy of such new entrant. The marketing director of Voyage has asserted that the new entrant sells across all the segments; from luxury to mass segments. In other words, the competitive market has adopted mixed pricing strategy. The price of Yachts has been set at varied ranges based on mass, mid and luxury segments.

It is recommended that Voyage should also follow the same pricing strategy. As discussed earlier, the firm needs to produce lesser, set the price level lower than the previous to attract the customers and also target mass and mid-level segments. However, in this context different types of pricing strategies available for the firm to be used may be discussed. Premium pricing is setting the price of the luxury product at a level higher than the competitors for the purpose of attaining a premium position in the market (Öker & Ad?güzel, 2016).  The firm may consider the same for its luxury segments. Penetration pricing is basically applicable for new entrants where product offering is priced at a substantially low level to attract a greater number of customers (Šoljaková, 2012). Business may target mass and mid segment customers for this purpose. Apart from the above-mentioned types of pricing, there are other types of pricing strategies that may be applicable to the instant case. Geographical pricing, for example, is one of those strategies that Voyage may attempt to adopt. Such pricing requires setting different prices at different geographical locations based on the nature of the habitat, taste of consumers, local choice and preference and also the regional psyche towards the product offering (Herrera & Toivanen, 2015). Cost plus pricing is where the firm adds a pre-decided markup on the total cost of sales on a single product (Li, 2015). Contribution based pricing is the pricing where the firm sets the price of the product based on a pre-conceived markup and contribution earned per unit of product (Herrera & Toivanen, 2015).

Finally, it may be concluded that there are various types of pricing strategies available for the firm. However, management of Voyage should carefully consider the mix of strategies suitable for the business.

References

Agndal, H. & Nilsson, U. (2009) ‘Interorganizational cost management in the exchange process’, Management Accounting Research, 20(2), pp. 85–101.

Barton, R. & van den Broek, D. (2011) ‘Agency and the deunionisation of managers in an Australian telecommunications company’, Journal of Management & Organization, 17(02), pp. 210–225.

Bhimani, A., Horngren, C.T. & Datar, S.M. (2011) Management and cost accounting. 5th edn. Harlow, England: Financial Times/Prentice Hall.

Cardinaels, E. (2008) ‘The interplay between cost accounting knowledge and presentation formats in cost-based decision-making’, Accounting, Organizations and Society, 33(6), pp. 582–602.

DuhRong?Ruey, Lin, T.W., WangWen?Ying & HuangChao?Hsin (2009) ‘The design and implementation of activity?based costing’, International Journal of Accounting & Information Management, 17(1), pp. 27–52.

Herrera, G. & Toivanen, T. (2015) ‘Consistent Outperformance based on published information - or when reality defies theory’, Wilmott, 2015(78), pp. 10–11.

Li, X. (2015) ‘Accounting conservatism and the cost of capital: An international analysis’, Journal of Business Finance & Accounting, 42(5-6), pp. 555–582.

Lin, H. (2016) ‘An empirical analysis of activity based costing in Chinese enterprises’, Journal of Finance and Accounting, 4(5), p. 301.

Moyer, C.R. (2012) Contemporary financial management. 12th edn. United States: South Western Educational Publishing.

Öker, F. & Ad?güzel, H. (2016) ‘Time-driven activity-based costing: An implementation in a manufacturing company’, Journal of Corporate Accounting & Finance, 27(3), pp. 39–56.

Šoljaková, L. (2012) ‘Strategic management accounting development during last 30 years’, European Financial and Accounting Journal, 2012(2), pp. 24–35.