ICP 813-Report Structure

8/17/2019 ICP 813-Report Structure

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ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

STRATEGIC BUDGETTING: A CASE STUDY of A CONSTRUCTION CONSTRACTOR

COMPANY

UNIVERSITI TEKNOLOGI MARA UITM


Prepre! for:

Dr. Intan Rohani [email protected].!".m#

Prepre! "#:

Abdullah Muslim Bin Ahmad A Rasyid Bin Gani

Marliyana Binti Muhaiyuddin Nor Aina Izati Binti Ayob

D$e S%"'$$e! April 2016


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TABLE OF CONTENTS

1.0 INTRODUCTION

1.1 Background………………………………………………………………………………….1.2 Overview of Construction Industry in Malaysia………………………………………………

1.3 Objective of tudy…………………………………………………………………………..

2.0 LITERATURE REVIEW

2.1 Introduction2.2 Overview of Budgeting …………………………………………………………………………

2.2.1 Budgeting !rinci"le ……………………………………………………………………2.2.2 Budgeting #ools $ #ec%ni&ue…………………………………………………………

2.3 'actors (eading to 'inancial !erfor)ance

………………………………………………………2.3.1 *efinition 'inancial !roble)s………………………………………………………….

2.3.2 'actors of 'inancial !roble)s…………………………………………………………

2.+ Major 'inancial *ecision………………………………………………………………..………2.+.1 #y"e of 'inancial *ecision...………………………………………………………….

2.+.2 'inancial olution………………………………………………………………………

3.0 CASE STUDY: GSSB

3.1 Introduction

3.2 Co)"any Background…………………………………………….……………………………3.2.1 Overview of ,B…………………………………………………………………….

3.2.2 Core Business of ,B………………………………………………………………

3.3 -ow to develo" budget for ,B……………………………………………………………….3.1.1 Current 'inancial !roble)……………………………………………………………..

3.1.2 'inancial olution #owards 'inancial !roble) …………...……………………………

3.1.3 Budgeting !ro"osal for ,B………………………………………………………….

4.0 CONCLUSIONS AND RECOMMENDATION

+.1 Introduction+.2 Co)"any Background…………………………………………….……………………………

4.0 REFERENCES…………..……………………………………………………………….


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1.0 INTRODUCTION

1.1 BACKGROUND

owadays/ it can be said t%at )ost of co)"anies are striving in a c%allenge environ)ents/ w%ic%

often are illustrated by uncertainties and ra"id c%anges suc% elasticity of a financial conditions

es"ecially in t%e construction sectors and industries. 0nd still/ budget %as been t%e )ost effective

o"eration tool )ost co)"anies use to govern t%eir activities for ac%ieving sustainable and stable

financial structure.

Budgeting is t%e %eart of )anage)ent tool for an organiation to "lan/ )onitor and control t%e

finance of t%e organiation or "roject. Budgeting is a "ur"ose to esti)ates t%e inco)e and

e"enditures for a set of "eriod for t%e "roject or organiation. In order to )ake a successful budget/ everyone w%o works for an organiation or "roject s%ould work toget%er to for)ulate t%e

budget. #%is budget are need to be based on t%e objectives/ action "lans and )ust be refers to t%e

resources. 0ll t%is are very i)"ortant to develo" a clear actionable budgeting and can %el"

organiation to identify every e"enses %ave been o)itted and draws on t%e financial state)ents.


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1.2 OBJECTIVE OF STUDY

#%is "a"er intends to en%ance our understanding of budgeting and financial )anage)ent and its

relation towards construction related co)"any in Malaysia. #%e "a"er will discuss on t%e

&uestions of w%at and %ow a selected contractor co)"any facing/ dealing/ res"ond to financial

"roble)s and strategiing budgeting. 0t t%e end/ t%e writers will structures and develo" a better

budgeting fra)ework for t%e selected construction co)"any so it can beco)e a reference for

readers and ot%er budgeting studies. #%e following are t%e overall objective of t%is "a"er

i. #o identify and understand t%e conce"t of budgeting "rinci"le/ tools and tec%ni&ues

used for budgeting a "roject and co)"any

ii. #o identify factors leading to financial "roble) and financial decisions taken for a

construction co)"any

iii. #o develo" budget for t%e selected construction co)"any

1.3 OVERVIEW OF FINANCIAL PROBLEMS AMONG MALAYSIAN

CONTRACTORS

#%is "a"er intends to en%ance our understanding of budgeting and financial )anage)ent and its

relation towards


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2.0 LITERARTURE REVIEW

2.1 INTRODUCTION

2.2.1 BUDGETING PRINCIPLES

Based on researc% and references/ different organiations %ave different "rinci"les. #%ese

"rinci"les are created and used si)ultaneously. #%erefore/ t%ere are a few co))on budgeting

"rinci"les t%at can be a""lied to ac%ieve t%e co)"any4s objective.

- ustainability

Budget "lans "ur"ose is to ac%ieve co)"any4s goal. It )ust carries t%e value of

sustainability t%at is t%e ability to be )aintained at a certain rate or level 5Oford

0dvanced (earners *ictionary/ 26178. #%is )eans t%at budget to be created )ust %ave t%e

ability to be u"%eld or fit t%e "ur"ose. uttenfield 5261+8 recognied t%e actions t%at

s%ould be taken to ensure sustainability of budget "lan t%roug% focusing on custo)ary

financial ratios and "erfor)ance )etric/ observed organiations4 co)"etitive "osition and

)ake consideration of o""ortunity costs/ in addition to e"licit costs. O9C* 5261+8

)entioned t%at longer:ter) sustainability and ot%er fiscal risks s%ould be identified/

assessed and )anaged "rudently. Ot%er ways to ensure sustainability is to evaluate

"erfor)ance and )ake adjust)ents "rogra) and financial "erfor)ance s%ould becontinually evaluated/ and adjust)ents )ade/ to encourage "rogress toward ac%ieving

goals 5,overn)ent 'inance Officers 0ssociations/ 1;;;8

- 0lign)ent

uttenfield 5261+8 stated t%at a budget )ust be aligned wit% t%e vision/ )ission/ values

and strategic goals. O9C* 5261+8 su""orted t%is. -e stated t%at budgets s%ould be closely

aligned wit% t%e )ediu):ter) strategic "riorities of govern)ents4. #%ese s%owed t%at

budget )ust be aligned wit% t%e organiations4 goals and targets. #%e ,overn)ent

'inance Officers 0ssociation 51;;;8 in 0)erica also stated t%at t%ere )ust be broad goals

t%at "rovide direction and serve as a basis for decision )aking. #%erefore t%ey s%ould

also be aligned wit% goals t%at serve as a guideline w%en )aking a decision in "re"aring

budget


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- Clarity


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"erfor)ances w%et%er it increase or decrease wit% only one fied budget and t%ey can

analye t%e "erfor)ance based on ot%er justification.

- C&%#&''$%! Bu($%"(( C&(#(

0 static budget does not adjust its volu)e during t%e year regardless of sales figures or

co)"any "erfor)ance. #%e original budget will re)ain t%e sa)e even if your sales break

sales records. It will %el" your business control its costs and "rovides a level of certainty

for your finances. #%is allows you to )ai)ie your savings and ensure your co)"any is

s"ending every )oney as wisely as "ossible.

DISADVANTAGES

-N& I%#""(# & &" /u!"##$%! 5(#""% B((620127

@it% t%e certainty of budget to be used every year/ t%e co)"anies tend to re"eat t%e sa)e

"attern of allocation and it will lead to no budget "lanning at all. #%e co)"any will feel

co)fortable and secure wit% t%e budget "attern for every year and t%ey will find t%at

budgeting is not really i)"ortant.

- L*8 & F'"9$/$'$#

it is not fleible and so it cannot be c%anged to take advantage of c%anges in revenue or

e"enses as t%e year "roceeds. @it% a static budget/ co)"anies cannot )anage t%e i)"act

of c%anges 5(isa Magloff /*e)and Media8

2.2.2.2 INCREMENTAL BUDGETING.

- Most co))on )et%od and based on %istorical infor)ation wit% t%e )arginal

adjust)ents. 5I0/Aanuary 26168

C-ARACTERISTICS

- Co)bines t%e costs identified fro) t%e "revious accounting "eriod wit% t%e "ercentage

additions. 5Brown/ B. 5266;8 uccessful 'inance urrey Cri)son8- Budgeting syste) t%at take t%e current year as a starting "oint for "re"aring net year

budgeting5ntut%elo/2668

- #%is )eans t%at eisting o"erations and t%e current budgeted allowance for eisting

activities are taken as t%e starting "oint for "re"aring t%e net annual budget. It is

relatively straig%tforward. It is called incre)ental budgeting since t%e "rocess is )ainly


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concerned wit% t%e incre)ent in o"erations or e"enditure t%at will be incurred during

t%e net budget "eriod.- ?sed widely in "ublic and also "rivate sector

ADVANTAGES

- E($' u%"(#&&

#%e conce"ts of Incre)ental are very straig%tforward and understandable/ based on

"revious data and )ake )arginal c%anges t%roug% so)e discussion and negotiation

between t%e )anagerial and establis% it as t%e budget for t%e net "articular year.

- S#/'" % S"*u"5CMI 6201;7

@it% t%e knowledge fro) t%e %istorical data and "rediction of t%e condition of business

for t%e net year/ t%is ty"e of budgeting is )ore stable and secure. More or less t%e

co)"anies will not stray too far fro) t%e "redicted )argin because it was "lanned based

on convincing data 5"revious data8.

- I"$#" $*# & *+%!"

#%e result of t%e budgeting can be seen fast. @%et%er t%e budget is successful or not can

be seen for net year/ in only one year ti)e/ so t%e co)"any will %ave very i))ediate

"lans and an action to i)"rove and develo" t%eir co)"any in s%ort duration.

DISADVANTAGES

- B*8


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2.2.2.3 @ERO BASE BUDGETING

- In ero based budgets/ "ast figures are not used as t%e starting "oint. #%e budgeting

"rocess starts fro) =scratc%> wit% t%e "ro"osed activities for t%e year.-

C-ARACTERISTICS

- Because it is start fro) t%e scratc% t%e result is a )ore detailed and accurate budget/ but it

takes )ore ti)e and energy to "re"are a budget in t%is way.

-#%is tec%ni&ue is essential for new organiations and "rojects/ but it is also "robably t%e

best route to go in a dyna)ic organiation t%at is "roactive in taking on new c%allenges.

0 budgeting "rocess t%at allocates funding based on "rogra) efficiency and necessity

rat%er t%an budget %istory 5*eloitte/26178

ADVANTAGES

R"(u'#$%! /u!"# $(


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DISADVANTAGES

- C&(#'6 *&'"96 % #$" *&%(u$%! 5D"'&$##"6201;7

Because t%is ty"e of budget is rebuilt fro) scratc% annually so all t%e data s%ould gat%er

fro) t%e start and all t%e "rocess s%ould be fres% start. It also re&uires s"ecialied training

or "ersonnel to acco)"lis%/ and re&uires )ore resources in general so it will c%allenged

by budget cycle ti)ing constraints take ti)e and cost to "re"are all t%e re&uired data.

2.2.2.4 PERFOMANCE BASED BUDGETTING

!erfor)ance:Based Budgeting 5!BB8 is an effort to turn funding into results/ by outlining

a general c%ain of cause:and:effect.5!!M Conference/26128

Connect "erfor)ance infor)ation wit% t%e allocation and )anage)ent of resources. It is

'ocusing )ore on result rat%er t%an )oney s"ent. It "resents t%e )ajor "ur"ose for w%ic%

funds are allocated and sets )easurable objectives.

Mostly used in "ublic sector.

ADVANTAGES- I&" "9"%$#u" $&$#$#$&% 5R&/$%(&% ) Du%*% 62007

#%e co)"any )anage)ent can decide w%ic% "roject or events t%at need to be "rioritie

based on t%e "erfor)ance or benefit t%at need to be ac%ieved.

- E%*&u!" #& ("% &" "$*$"%#' % ""*#$"' 5R&/$%(&% ) Du%*% 62007

#%e )anage)ent can know and decide w%ic% area t%at t%ey need to s"end )ore

efficiently so t%at it can be wort% wit% t%e "erfor)ance t%at t%ey e"ected to ac%ieve.

- S""( ( (##"!$* '%%$%! #&& 5N$%620037

It can i)"rove t%e clarity/ and consistency of "roject designs/ facilitating a co))on

understanding and better co))unication between different de"art)ents and staff in

general of t%e desired results of "rojects

DISADVANTAGES


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#%e )anage)ent )ay %ave different ideas regarding w%at is i)"ortant about t%e

co)"anyDs work 5C(/261E8. Because of t%e "erfor)ance e"ected result is too

subjective/ t%e )anage)ent )ig%t %ave differences ideas and o"inion in "rioritie t%eir

budgeting.


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3.0 CASE STUDY: GREAT SUBSTANCE SDN B-B 5GSSB7

3.1 COMPANY BACKGROUND

3.1.1.OVERVIEW OF GSSB

GREAT SUBSTANCE SDN B-D 5GSSB7 co)"any no 76667:F was incor"orated in 2666

as a builder in construction industry. It %as been active o"eration since its ince"tion wit% t%e

effort of a tea) of well:e"erienced "ersonnel. 'ro) its for)ation in Marc% 2666/ ,B %as

co)"leted and its "resently carrying out "rojects )ainly for "rivate sector. #%ese include Civil/

Building and Infra:structural engineering "rojects/

COMPANY INFORMATION

REGISTERED NAME ,90# ?B#0C9 * B-*

5COM!0G O 76667:F8DATE OF

INCORPARATION

13#- M0C- 2666

AUT-ORI@ED CAPITAL M 1/666/666.66

PAID UP CAPITAL: M H76/666.66

BOARD OF DIRECTORS M C-?0- 0- 9,

M -9@ @9 C-O,

ADDRESS: C#:6+:21/ CO!O0#9 #O@9/

?B0, ?09/ A0(0 17J+,

+H766/ ?B0, A0G0/ 9(0,O *0?( 9-0

#9( 63:7E3H612E

'0F 63:7E3H612;

COMPANY>S LOGO

@e decided to select t%is co)"any because we %ave enoug% infor)ation regarding t%is co)"any

and also its financial infor)ation. @e also felt t%at t%is co)"any is suitable as it is a construction

co)"any wit% )any years e"erience and also )atc%ed wit% t%e re&uire)ent of t%is task.


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3.1.2 C&" /u($%"(( & GSSB

,B %as built u" a tea) of co)"etence "ersonnel and associate co)"anies to undertake t%e

following activities.

18 Civil engineering @orks/ Building @orks/ 0rc%itectural @orks and Construction works

28 'ull range of Mec%anical and electrical ervices inclusive of - 0ir Conditioning $


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(ower debt ratio is )ore favorable t%an a %ig%er ratio. 0 lower debt ratio s%ows a )ore stable

business because a co)"any wit% lower ratio %as lower total debt. 9very industry %as different

benc%)arks for debt/ but overall 6.7 is acce"table ratio. atio of 6.7 is less risky. atio of 1

s%ow t%at total liabilities e&uals to total assets. ,B debt ratio is slig%tly above 6.7 but still

under 1.6. #%is "roves t%at ,B can )anage t%eir debt wit%out drastic financial c%anges.

0 lower debt e&uity ratio s%ows a )ore financially stable business. Co)"anies wit% a %ig%er debt

e&uity ratio are considered )ore risky to creditors and investors. ,B %as a very %ig% debt

e&uity ratio due to its nature of business t%at are ca"ital intensive t%an ot%er sectors. Co)"anies

in construction industry easily attract e&uity invest)ents t%an using stake%olders funding.

Overall/ t%e co)"any4s financial situation s%ows t%at t%e co)"any is well establis%ed and stable

financially even t%oug% t%ey are involved in risky financial conditions.

3.2.2 GSSB P$%*$'"( 6T&&'( % T"*+%$,u" $% ""'&$%! /u!"#

Budgeting !rinci"les

'ro) t%e annual re"ort of ,B/ s%ows t%at t%is co)"any %as all "rinci"les w%ic% are t%e

financial state)ent are in line wit% t%e )ission of t%e co)"any. 0s stated by uttenfield 5261+8/

t%e budget "lan )ust be aligned wit% t%e vision/ )ission/ values and strategic goals. #%eir annual

re"orts are "re"ared in in detailed and very clear to understand. #%eir annual re"ort also s%owed

sustainability. #%eir budget "lan %ad created t%e ability to be u"%eld or fit t%e "ur"ose. O9C*

5261+8 )entioned t%at longer:ter) sustainability and ot%er fiscal risks s%ould be identified/

assessed and )anaged "rudently. #%eir budget also s%ows clarity. Based on uttenfield 5261+8/

clarity can be ac%ieved by co))unicating about financial "olicy and budget decisions in easily

understood and re)e)bered ter)s.

#ools and #ec%ni&ue in develo"ing budget

,B %ad used t%e incre)ental a""roac%. #%e incre)ental cost of ca"ital refers to t%e average

cost a co)"any incurs to issue one additional unit of debt or e&uity. 'ro) t%e reading of "revious

annual re"ort s%ows t%at ,B are )ostly involved in t%e sa)e ty"e of activities and "rojects in

t%e construction industry. #%erefore t%eir "attern of e"enses every year is si)ilar. #%ey adjust

t%e a)ount t%ey s"ent based on t%eir "revious activities and "rojects.

3.2.3 FINANCIAL PROBLEMS FACED BY GSSB


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3.2.4 MAJOR FINANCIAL DECISION BY GSSB


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3.2.; BUDGETING PROPOSAL


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4.0 CONCLUSION ) RECOMMENDATION

4.1 SUMMARY OF PAPER

#%e "ur"ose of t%e study was to identify t%e syste) of budgeting and budgetary control "ractice

ado"ted in 9rnest C%e)ist and analye %ow effective it is for t%e co)"any. In addressing t%e

"ur"ose of t%e study/ t%e )ajor to"ics on w%ic% t%e literature was reviewed includeK nature of

budget/ et%ical issues and budgeting functions of budget/ "ersons involved in budgeting/

a""roac%es to budgeting/ ty"es of budgets and budgetary control. #%e instru)ent used in

collecting t%e data for t%e study was a self:designed &uestionnaire. #%e researc% reveals t%at/ a

budget co))ittee under t%e control of t%e budget director )ostly does t%e "re"aration of

budgets. It is "re"ared )ostly every year and it is "resented to t%e board of directors for

a""roval. 0s a result of t%e fre&uent control )easures in "lace/ t%e co)"any is able to avoidc%allenges like inflation and waste.

4.1 CONCLUSIONS AND RECOMENDATION

'ro) t%e findings of t%e study/ it was concluded t%at t%e a""ro"riate syste) of budgeting and

budgetary control %as been ado"ted and used to "re"are t%e "%ar)acyLs budgets. 0nd t%is %as

stated clearly t%e various levels t%e budget "re"aration %as to go t%roug%. #%is syste) %as also

"rovided guidelines for )anagers and su"ervisors to ensure t%at t%ey t%ink well a%ead of ti)e to

foster effective utiliation of li)ited resources of t%e organiation. Because budget "re"aration

"lans are )ade a%ead of ti)e/ t%e targets w%ic% )anage)ent of t%e "%ar)acy %o"es to ac%ieve

are )ost often easily recognied. #%e "re"aration of budget %el"s in designing or clarifying t%e

lines of %oriontal or vertical co))unication wit%in t%e organiation. #%e res"ondent also gave

%is general i)"ressions on budgetary control at 9rnest C%e)istK %e said t%e budgetary control

syste) w%ic% is currently in use is )ore a""ro"riate for t%e co)"any since t%e syste) involves

co)"arison of actual levels of "erfor)ance against budgets and re"orts all variances wit% "ro"er

analysis to "rovide a basis for future courses of action. Based on t%is %e t%inks t%e current

budgetary control %as intensively i)"roved as co)"ared to t%e "ast years and %e %o"es t%at it

will be better for t%e years to co)e. On t%e ot%er %and/ t%oug% t%e a""ro"riate syste) is ado"ted

and is in use/ t%ere are still "roble)s wit% its effectiveness. #%ese "roble)s are associated wit%

t%e et%ical issues )entioned earlier/ for ea)"le t%e lack of true integrity in t%e budgets. #%is

stands to back t%e state)ent )ade by Ma%er and *eakin 51;;+8/ w%ic% suggests t%at co)"anies


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s%ould "rovide incentives for "eo"le to re"ort trut%fully/ )eaning t%e co)"any )ust reward bot%

for %onest esti)ate and good "erfor)ance. #%e true integrity of t%e budgets can be c%ecked for

t%is "ur"ose using t%e co)"anyLs eisting budgetary control syste). But t%e reality is t%at/ )any

co)"anies "ut considerable "ressure on e)"loyees to ac%ieve increasingly difficult targets

wit%out any for) of incentives. #%e findings of t%e study indicate t%at as a result of t%ese

"roble)s/ t%e cas% budgets are so)eti)es overstated. 'ollowing t%e findings fro) t%e researc% I

reco))end t%at t%e to" eecutives s%ould )ake "rovisions to give so)e for) of incentives to

)otivate )anagers and budgeting staff so t%at t%ey can "re"are a good budget for individual

de"art)ent wit% ade&uate infor)ation w%ic% are reliable.


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;.0 REFERENCES

1) ZER !"#E$ !%$&ETT'(& *ero or ZER+,$eloitte -ublications 10) 2ublic 2erformance 3easurement 4 Re-orting (et5or6 )223R( Conference

1

7) 3ethods of !udgeting,Research and library ser8ices (orthen 'reland

"ssembly,9anuary 1

(ational conference of state legislati8es (C#:,1; rom traditional budget -lanning to ?ero@based budgeting

Rele8ant to 2!E 2a-er '' 3anagement "ccounting and >inance)

$r >ong Chun Cheong, #te8e, #chool of !usiness, 3acao 2olytechnic 'nstitute

Chartered management institute C3') 10

A) >leBible !udgets and 8erhead "nalysis 3c&ra5@*ill Ryerson,1)) Dey "d8antages 4 $isad8antages of %sing a #tatic !udget ,:isa 3agloff of

$emand 3edia

) &uide to 2erformance based !udgeting@C&& Collected For6ing 2a-ers 7‐

G Holume $r !. (a8in)

10) O9C*. 5261+8. The -rinci-les of budgetary go8ernance. !aris O9C*

!ublis%ing.

11) uttenfield/ . 5261+8. &uiding 2rinci-les for "nnual !udgets and 3ulti =ear

>inancial 2lanning. Illinois.

12) !ress/ O. ?. 526178. Bford "d8anced :earners $ictionary. etrieved

%tt"JJwww.ofordlearnersdictionaries.co)J

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