UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ LE THI KIM DUNG INEFFECTIVE COST BUDGETING PROCESS AT PHUC DAT LAND JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION Ho Chi Minh City - 2017. TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ LE THI KIM DUNG INEFFECTIVE COST BUDGETING PROCESS AT PHUC DAT LAND JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: TRAN PHUONG THAO Ho Chi Minh City - 2017. TIEU LUAN MOI download : skknchat@gmail.com SUPERVISOR’S REPORT ON THE FINAL THESIS SUBMITTED FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION Final thesis title:. General comments: Remarks on the student’s attitude:.
Remarks on the assignment’s academic quality:. Overall assessment: Meet requirement for submitting; Not meet requirement for submitting. Other remarks: - Did the student follow the report schedule? Yes No Other. - The Turnitin plagiarism percentage: Supervisor’s signature TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS I would like to acknowledge all who supported me during my studies without whom my thesis could not be completed in a proper way.
I would especially like to thank my supervisor – Professor Tran Phuong Thao for all her advice and guidance, without her help I could not have my thesis done in the right way. I also would like to show my dedication to my colleagues at work for their continuous support. I also send my sincere thankfulness to my parents and friends for their care, support and encouragement. TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENTS.
LIST OF FIGURES. LIST OF TABLES. Background of Phuc Dat Land Joint Stock Company. Symptoms of the problem .1 Significant gaps between actual and budgeted expenses .2 Late completion of Budgeting in 2017.
CENTRAL PROBLEM VALIDATION .1 Identification of the Central problem .2 Central problem definition .3 The importance of the problem. ALTERNATIVE SOLUTIONS AND ACTION PLANS .1 The first solution: Build a clear process and schedule for exchange information among departments .2 The second solution: Training for manager and assistant manager levels .1 Summary of Methodology conducted .5 Cost comparison Reports in 2015 and 2016. 56 TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1: Phuc Dat Land Joint Stock Company structure .2 Figure 2: Initial Cause – effect Map. 12 Figure 3: Final Cause-effect Map.
21 Figure 4: Meeting schedule for Budget preparation at Phuc Dat Land. 29 Figure 5: Respondents information: Gender, Working years, Level, Department classification at Phuc Dat Land. 36 LIST OF TABLES Table 1: Phuc Dat Land Actual and Budget Cost in 2015 .3 Table 2: Phuc Dat Land Actual and Budget Cost in 2016 .3 Table 3: Cost structure in Budget of Phuc Dat Land Joint Stock Company.5 Table 4: Significant differences in % between Actual and Budget data .6 Table 5: Level of factors affect budgeting process at Phuc Dat Land. 23 Table 6: Estimate cost for budget skill training organized by Smarttrain center for Managers and Assistant Managers at Phuc Dat Land.
32 Table 7: Summary information of respondents of first In-depth interviews. 39 Table 8: Summary information of respondents of second In-depth interviews. 44 Table 9: Phuc Dat Land Actual and Budget Cost in 2015. 52 Table 10: Phuc Dat Land Actual and Budget Cost in 2016.
53 TIEU LUAN MOI download : skknchat@gmail.com EXECUTIVE SUMMARY As the economy dramatically grows up, companies are competing fiercely to survive and contribute to that development. Generating revenue is always an important issue in business plans that every entrepreneur pays much attention to aim at maximizing profits. However, nowadays, cost management also plays an important role in the business and budget has become a necessary activity of any organization for the purpose of well-controlled expenses to maximize its benefits. Without a proper budget, a business can hardly keep track of how much it has earned and how much it has spent to meet its shareholders’ expectations related to profits and the organization’s goals.
This thesis aims to explore the causes of significant variance between budget and actual financial results in 2015, 2016 and the late completion of budget in 2017 at Phuc Dat Land Joint Stock Company (“the Company”). In-depth interviews were conducted to generate the understandings from highly responsible positions about budgeting at the Company and figure out the central problem related to Budgeting. The findings of this study revealed that ineffective cost budgeting process tends to play a significant issue in the matter of budget engagement and leads to the difficulties in finalizing budget on target timeline. The findings are discussed in details in the research along with some recommendations for the company and management to improve the budgeting process and cost management ability to get better results which directly affects departments’ performances evaluation and the whole company’s in general.
Page | 1 TIEU LUAN MOI download : skknchat@gmail. Background of Phuc Dat Land Joint Stock Company Established in 2013, Phuc Dat Land Joint Stock Company is a company operating in real estate industry, major in leasing office building in Ho Chi Minh City. It belongs to Son Kim Group which is one of the most successful corporations in this industry. The Company mains business is leasing Empress Tower Building at 138-142 Hai Ba Trung, District 1, Ho Chi Minh city with 17 floors and its revenue is nearly 170 billion VND per year.
As the company operates under the control of Son Kim Group, it has to follow the performance management from Head office (“HO”) with approved Budget and KPI set by BOD. This is also agreed by the Investors from EXS Capital – an investment fund from Hong Kong who has invested for most of Son Kim Group projects including Empress Tower Building. The operation of the Company does not fluctuate much as the stable number of lessees. However, cost through years have been changed due to the demand of maintenance and renew the building to increase the quality of its service.
There are four main departments in which are under controlled of BOD. The company’s structure is drawn as following chart: Board of Directors Sales & Accounting Property Technical Human marketing department management department resources department Operation Internal Leasing Marketing control Security Figure 1: Phuc Dat Land Joint Stock Company structure (Source: Human Resources Department of Phuc Dat Land) Page | 2 TIEU LUAN MOI download : skknchat@gmail. Symptoms of the problem 1.1 Significant gaps between actual and budgeted expenses P&L comparison between Actual and Budgeted Revenue, Operating expenses and EBITDA reports of Phuc Dat Land in 2015 and 2016 are showed as below (shortened version showed) which reflected the operation results of the Company in these two years. It was not a bright picture as there were many issues need improving.
2015 Variance Actual Budget Amount % Gross Revenue 158,027,699,003 159,209,516,144 -1,181,817,141 -1% Operating 115,299,557,251 107,184,342,908 8,115,214,343 8% expenses EBITDA 42,728,141,752 52,025,173,236 -9,297,031,484 -18% Table 1: Phuc Dat Land Actual and Budget P&L in 2015 (Unit: VND) (Source: Phuc Dat Land Profit and Loss 2015 report) 2016 Variance Actual Budget Amount % Gross Revenue 169,177,516,286 167,588,373,520 1,589,142,766 1% Operating 124,516,336,035 116,220,033,417 8,296,302,618 7% expenses EBITDA 44,661,180,251 51,368,340,103 -6,707,159,852 -13% Table 2: Phuc Dat Land Actual and Budget P&L in 2016 (Unit: VND) (Source: Phuc Dat Land Profit and Loss 2016 report) It indicated that there was significant difference between actual and budgeted in operating expenses. Operating expenses includes COGS, Selling and G&A expenses which are presented above in the format of management accounting reports of the Company. Revenue did not fluctuate much as there were very little differences between actual and budgeted amounts (around 1%) due to the stable income sources coming from loyalty customers who have signed leasing Page | 3 TIEU LUAN MOI download : skknchat@gmail.com contracts for over 5 years. Revenue stayed stable but cost differed from what had been budgeted a lot led to the fact that actual EBITDA in both years were much lower than Budget.2 Late completion of Budgeting in 2017 According to Budgeting schedule sent out by Finance Department from Son Kim Group, 2017 Budget must be finalized at the end of 2016 to prepare business plan for up-coming year.
However, the Company did not meet that compulsory deadline. Budget for 2017 has not been finalized until the end of June 2017 after many revised versions. This information was obtained from Ms. Vy Oanh – Chief accountant (CA): ‘Budget of 2017 was revised many times.
Targets sent out by the BOD were presented in many versions. I even did not remember which the last one was until it was updated into the company’s system for final records. And after about 8 months, the final budget was approved by the BOD on June, 2017.’ This information was confirmed by Mr. Dung Tran - Head of Finance and Accounting Department of Son Kim Group.
‘2017 is the third year Son Kim Group applying Budget in Management Control and Performance evaluation. Therefore, there were still some deficiencies in the experiences and processes that led to the fact that it took months to complete the Budget. This came from objective and subjective factors that we tried to deal with but still behind schedule.’ Actually, budgets of 2015 and 2016 were also behind the schedule. In 2015, this was the first year the company applied Budgeting in management activity that it took around ten months to get used to the model and to build up a complete budget.
In 2016, the situation was improved but still under expectation that it Page | 4 TIEU LUAN MOI download : skknchat@gmail.com took more than seven months to finalize approval budget for the fiscal year. 2017 was also an unsuccessful year of Budgeting at Phuc Dat Land.1 Situation analysis Variance analysis in Cost budgeting Concentrating on operating expenses, we need to understand the cost structure of the Company first. Each department of the Company is a cost center which is responsible for expenses allocated by their characteristics activities. The Cost structure of the Company is presented as following: % in total Operating Cost No.
Type of expenses Department in charge 2015 2016 1 Personnel and related expenses Human resources 8% 9% 2 Repair and maintenance Technical department 19% 18% 3 Building management Property Management 67% 66% 4 Marketing & Commission Sales & Marketing 1% 1.5% 5 Other operating expenses Accounting department 5% 5.5% Total 100% 100% Table 3: Cost structure in Budget of Phuc Dat Land Joint Stock Company (Source: Accounting Department of Phuc Dat Land) This table shows the percentage of expenses under control of each department in the total budgeted cost of the Company in two years 2015 and 2016. The building management expenses accounts for the highest portion in total cost followed by Repair and maintenance expenses belongs to Technical department while Marketing and Commission fee stays lowest. Cost portion of each type of expenses remained stable among years according to the company’s perdurable operation. This cost structure helps author in clarifying the problem related to significant differences in cost between actual and budgeted amounts and the control of expenses of Phuc Dat Land by reviewing in detail each type of expense and looking for the most fluctuated ones.
Page | 5 TIEU LUAN MOI download : skknchat@gmail.com At Phuc Dat Land, revenue and costs are budgeted for every fiscal year which is known as KPI of the Company in Son Kim Group. Based on this, the Company performance will be evaluated at the end of the year. Each department is allocated to be responsible for each type of revenue or expense and the criteria to evaluate their performance is the actual result compared to budgeted amount. Therefore, the effectiveness of each department in revenue push-up or cost controlling will affect the whole company KPI result at the year-end.
Variance in costs is a big issue of the company currently.