Financial reporting

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Financial reporting

Financial reporting is the process in which an organization produces reports often referred to as statements, which are used to give financial data to users of the financial statements within the organization. The statements, and the information they contain is useful in that it assists in making financial decisions such as determining the type of resources to dedicate to specific operations within the organization. Since the data collected from the organization’s daily activities is merged into one simple format, it makes it easy to make decision as well as allow financial reporting in real time. It is therefore an important part of business operations and successful implementation allows the business to better manage its resources.

As part of its financial reporting process, ICBI should first understand the stages a budget goes though before implementation and then incorporate the use of financial reporting systems. The first stage in the budget cycle is the preparation and submission where an organization factors in its numbers and how they will be impacted by decisions made (CCS, 2019). Since ICBI is made up of different departments that all hand in projections regarding the need they want the budget to address, the organization must factor in all the requirements when preparing the budget and then submit it for review. After submission, the cycle moves into the approval and execution stage where elected officials and managers decide whether the budget is applicable (CCS, 2019). Once approved, the execution stage begins and this is often during the organization’s accounting period such as the fiscal year. During this stage, the budget can be adjusted accordingly to ensure that the business is able to meet its overall objectives.

Lastly is the audit and evaluation stage which normally takes place after the accounting period has ended. Auditors go over the financial activities undertaken by the organization throughout the accounting period to assess whether operations adhered to the provisions created by the budget as well as measuring the level of accuracy in the financial projections made while the budget was being created (Lander, 2019). A final report is then created with suggestions on hat budget cycle to use in the next financial year. In the case of ICBI, the company can greatly benefit from financial reporting if it uses an activity budget instead of an operating budget.

An activity based budget operates by first identifying the opportunities that an organization could benefit from various activities and then structures the budget in such a way that will enable the organization to benefit from each activity. The activities are determined by the goals already set by the organization and prioritizes the activities by providing resources needed to fulfill each activity (Lander, 2019). An operating budget on the other hand observes the previous year expenses and revenues for an organization where data used is made up of growth forecasts and projections made by a business. It also considers past growth trends for an organization and economic factors within the industry that could affect the goals set by the business.

One major reason why ICBI should use an activity based budget is because the business is new and therefore does not have the records and statements needed when using an operating budget. The process is better suited for the company as it will help in identifying areas within the organization that need more capital allocations than others (Sessoms, 2018). Being a new company, the business has to rely on various methods that will ensure it remains competitive and is able to allocate resources accordingly. The company can also rely on the activity based budget to evaluate all activities that consume resources. Since the process evaluates all activities that occur within the organization, ICBI will be able to identify all the steps involved in actions taken to produce goods and services. Doing so has an advantage in that it allows the business to do away with irrelevant activities, and therefore saves resources and capital in the process.

There is also the option of the operating budget which focuses on what the company is likely to spend on activities projected for a given duration of time, usually a company’s financial year. Although the operating budget approach could be applied in ICBI operations, its success will be limited by the fact that the company is new, and therefore lacks the statements and information needed to predict likely outcomes for the business in the next fiscal year (Gaffney, 2019). The reliance on previous data is what differentiates the operating budget from the activity based budget and also makes the latter the most applicable approach for ICBI.

In order to implement and benefit from its budget, ICBI should try to follow the basic budgets guidelines to aid in its operations. Among these guidelines is the need to set a realistic budget for the company. Enough research and analysis should be conducted to ensure that the guidelines provided by the budget are applicable and can be achieved (Pant, 2019). Another guideline will be to make the budget flexible enough to accommodate any changes. Although a lot of research is conducted when making a budget, most of the predictions of future events is likely to evolve. The budget must therefore be flexible enough to accommodate any deviations from the laid out plan.

Like any organization, ICBI will rely on its budget to determine the nature of actions to undertake and what activities to invest in. since the business is new, it will benefit the most from an activity based budget especially due to lack of past statements on business performance. Other than having the correct approach, the company must also adhere to the guidelines set to guide the implementation of the budget so as to ensure that the most profitable outcome is achieved and in so doing, help meet the set goals and objectives.

 

References

Credit Counseling Society, (2019) “How much money you should spend on living expenses:        Budgeting guidelines for income” retrieved from,          https://www.nomoredebts.org/budgeting-guidelines

Gaffney, Cynthia, (2019) “What is an operating Budget?” Chron

Lander, Steve, (2019) “Phases of a budget cycle” retrieved from,    https://smallbusiness.chron.com/4-phases-budget-cycle-71723.html

Pant, Paula, (2019) “Five simple budgeting guidelines to follow” The Balance,

Sessoms, Gail, (2018) “What is a budget cycle?” USA Today, retrieved from,             https://yourbusiness.azcentral.com/budget-cycle-2165.html