Influence Tactics And Compliance Requirements For Padding A Budget Essay For Howzit Pty Ltd.

Discuss about the Influence Tactics on Padding a Budget Slack.

Howzit Pty Ltd is the proprietary limited entity that is registered with Australian Securities and Investment Commission. Located in the area of Brisbane, it is involved in the business of running 15 stores retail chain. The main services provided by the company are home ware furnishing products to the entire Greater Brisbane area. The company has extended their business from 1 store to 15 stores over last 5 years.

1. Budget for sales and profit

1. Cash flow analysis and GST
2. Analysis for debtors ageing

Sales per item –

The company is liable for paying 4.75% as payroll tax on total wages, if the amount is more than $ 850,000. Further, it is liable for paying the luxury car tax and FBT (fringe benefit tax). These taxes are applied by Australian Government for reducing the fraudulent activities carried out by the company. Te prescribed rate of tax on luxury car is 33% by Australian government (Ato.gov.au 2016). 

Companies registered in Australia must comply with the below mentioned regulations as per Corporation Act 2001 –

• The company’s capital shall be used in effective manner for paying the liabilities
• The company is liable to publish the actual records associated with the financial performances to debtors for enabling them to analyse the financial viability of the company.
• The company shall prepare its financial statements complying with the accounting standards.

As the current software of the company is not able to provide revenues and expenses analyses and the profit estimation process difficult, the company is required to install better software like MYOB or XERO to manage the in better way.

MYOB – it is the simple software for accounting and generally used by the SMEs. This software is simple and powerful that focuses on the business processes and work flows. It is GST ready and compliant with GST (Curtis 2015).

XERO – it is the cloud based software and is able to reconcile, send quotes, send invoices, record receipts and create the expenses claims. It is easy to use and enables the user to extend the usefulness of the software from all the possible aspects. It can further be used regardless of the software history (King 2015).

Among the above mentioned 2 software, the company shall go for MYOB software as it is cheaper and easy to install as compared to XERO.  

1. Matching principle – it is associated with adjusting entries and accrual accounting method. It is the basic guideline in accounting and it directs the company for reporting the expenses in the income statement of the same period in which the revenue is related. It is important for budget preparation as if the cost is not determined the expenses cannot be charged.
2. Account groups – it is the grouping or segregating of similar types of accounts into the single group. It helps to differentiate the accounting groups without which the budget cannot be prepared. The reason is that if the income items are included under expenses, it will change the entire budget (Andre, Lam and O'Donnell 2016).
3. Time periods – time period is the segregation of accounting into month, quarter or year. Without proper time periods, the budgets cannot be prepared as one period’s data will be included in another period. 

The concept of the term probity is relative and it cannot be defined in managerial and economic framework. The requirement of probity protects community and puts their rights and interests of all the individuals and moreover the group over the individual person. Therefore, while preparing the budgets or revising the budget, it probity must be implied so that the users can analyse the actual financial status of the company. It will protect the user’s right as they are entitled to know the actual status of the company.

Identification of compliance requirements and the liabilities under Corporation Act 2001

Most suitable time to prepare the next year’s budget is after previous year’s budget publication. The reason is that it will give the idea regarding expenses and incomes that can be taken place in next year. The proposal will be as follows –

• The accountants shall make the assumptions on more appropriate basis which in turn will minimize gap among budget and actual amount. It will further alter the unfavourable variance into favourable variance.
• Budget shall be prepared with new software installed by the company.

• While preparing the budget, the figures of previous year shall be taken into account to prepare the budget realistically.
• Proper authorization and safety shall be maintained to enhance internal control and reduce exploitation

Through audit trail the accounting records to which the items are associated can be traced. The recommendations for maintaining internal control are as follows –

• Proper authorization shall be there to access the financial records and for modifying or altering the records
• The financial records shall be reconciled on regular basis to minimize the errors, frauds or misstatements (De Simone, Ege and Stomberg 2014)
• All transactions shall be properly numbered and dated to have easy access
• The stocks and inventories shall be physically checked to minimise the fraud or theft 

1. significant issues from budget

The margin of sales though increased over the years, the main issue is that the discounts offered by the company are encompassing the additional profit. The time allowed for the debtor payment has an adverse impact on the company’s cash flow (Hope and Fraser 2013). Moreover, the increasing interest rate of the bank is adversely impacting the company’s financial viability.

1. Actual to budget variance report
2. Reasons for variance

It can be seen from the above table that though the actual sales are more as compared to the budget, the actual gross profit of the company is lower as compared to the budget. The main reason behind this is the discount offered by the company to comply with market scenario. Further, the increase in the material cost due to recession made the COGS costlier. The increase in the bank interest rate also enhanced the interest expenses which in turn reduced the net profit. Further, the increases of operating expenses were mainly owing to the unstable and unfavourable economic condition in Australia (Henttu-Aho and Järvinen 2013). Moreover, the global pressure forced the company to increase the operational activities which in turn increased the overall operating cost.

1. Comparison of financial performance

Though the actual sales are more as compared to the budget, the actual gross profit of the company is lower as compared to the budget. The main reason behind this is the discount offered by the company to comply with market scenario. Further, the wages and salaries paid by the company to its employees are considerably high as compared to the industry benchmark of 11% of sales. However, owing to the increase in sales and profit the company was able to make the payment towards debt (Droms and Wright 2015). Further, the reduction of demand has been compensated through advertising for creating awareness among the customers. Therefore, it can be stated that despite of the inflation, company was able to maintain and enhance the profit profit margin through the service quality and brand image.

1. Performance questions raised by CEO

The company was able to maintain the profit margin even in the global pressure and economic fluctuations. Further, the offered discounts for enhancing the sales can be crucial fact to cope up with the inflation. However, as per the present scenario the company is financially viable owing to their long term strategic plans that can be the answer regarding the question of CEO on performance. Further, the gross margin of the company for the quarter of 2015 at 42% is comparatively better as compared to the industry average which ranges from 25% to 35%. Therefore, it can be stated that the company is able to adjust with the estimated fall through maintain the gross margin.

• Average debtor days and effect on cash flow

For analysing and computing the operational expenses the company shall take into consideration both the present as well as past budgets. Further, the company shall review the budgets and make necessary amendments to meet its short-term objectives. Further, in case of introduction of any new product the company shall review its sales and production budget. 

The management shall analyse the operating cost of business on daily basis to manage it more efficiently. In terms of credit, the company shall reduce the credit period and provide the invoices through automated systems to reduce the error. Further, it shall install the MYOB software and maintain the records in that to improve the process of financial management.

Reference

Andre, S.M., Lam, M. and O'Donnell, M., 2016. Budgetary Slack: Exploring the Effect of Different Types, Directions, and Repeated Attempts of Influence Tactics on Padding a Budget. Academy of Accounting and Financial Studies Journal, 20(3), p.147.

Ato.gov.au., 2016. Working out the LCT on an import. [online] Available at: https://www.ato.gov.au/Business/Luxury-car-tax/Working-out-the-LCT-amount/Working-out-the-LCT-on-an-import/ [Accessed 09 Mar. 2018].

Curtis, V., 2015. MYOB Software for Dummies-Australia. John Wiley & Sons.

De Simone, L., Ege, M.S. and Stomberg, B., 2014. Internal control quality: The role of auditor-provided tax services. The Accounting Review, 90(4), pp.1469-1496.

Droms, W.G. and Wright, J.O., 2015. Finance and accounting for nonfinancial managers: All the basics you need to know. Basic Books.

Henttu-Aho, T. and Järvinen, J., 2013. A field study of the emerging practice of beyond budgeting in industrial companies: an institutional perspective. European Accounting Review, 22(4), pp.765-785.

Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.

King, A., 2015. Xero soothes auditors on automation.