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Managment Accounting Assignment
Managment Accounting Assignment
P1:-
Management Accounting
Management accounting,also referred to as cost accounting, is the process of cost and
operations analysis in order to prepare a financial report to help managers in the decision
making process for the company’s goals and objectives,it is a way to translate financial and cost
data into information that is helpful and easy to understand for the decision makers of the
company.
Management accounting originated in the 19th century industrial revolution ,as during that time
everything was controlled by the owner and most debts were received from relatives or personal
friends of the owner or use of his own assets.
During the turn of the century, companies were pressured to maintaining their financial accounts
by capital market ,creditors and federal taxation of income,managers then started to audit and
present their financial information which then would be the very basis of management account
systems and through time would affect the view of cost accounting as a need for all companies.
● Maintain profitability
There are many management accounting tools that are used to keep the business profitable,
including performing a break-even analysis. with this type of analysis, management accountants
can weigh the sales against the variable and fixed costs to determine when the company breaks
even as knowing this can help the management determine production levels, sales, future goals
and overhead costs among other things. Management accounting can examine direct and
indirect manufacturing costs that can help optimize the company's cost structure
Is obligated ? Yes No
P2:-
When giving out financial information that information has to be accurate, timely, specific and
organised and has to be presented with context that can give it meaning and relevance. As
information can affect the decision and any outcome for the company.
Data collected for financial statements must be relevant for the purposes that is it is going to be
used, and this will require a review to reflect changing needs and this review is conducted in an
annual basis to ensure relevance.
Data collected also should reflect stable and consistent data processes across all points of time,
as this could target performance that could reflect real changes in the variations of data
collection approaches and methods.
Data should be presented with accuracy in mind so it can be used for its intended purposes and
is usually captured only once and has multiple uses. Data should be captured at the point of
activity
With that being said information must be understandable and easy to get ideas from when read
as information gives us ideas on how to plan, control and organize for the decision-making.
information presented must have a legitimate background of business activity that represents
the understanding of the data, and must be considered when giving out this information is the
information must be understandable by all users and there are two main external users in mind
investors and creditors also users are assumed to have comprehension of and the ability to
study accounting, business and Concepts needed to understand the information presented. But
a fundamental problem is that each of them will not fully understand complex information thus
we must present that information in an organized, understandable way and must be published
correctly.
As stated management accounting reports can help monitor the company's performance and
are prepared throughout accounting periods depending on the type of project And it's time
frame a manager may request reports quarterly, monthly ,weekly or even daily.
Budget Reports:-
Budget reports analyze the company's performance and managers utilize it to show the
performance of their departments and control costs, the estimated budget for a period is based
on expenses from previous years.
If a department is over budget in previous years and cannot find a way to trim costs, the budget
for future years may need to be increased to a more accurate level.Managers can also use the
budget report to provide incentives to employees and use some of the funds giving out as
bonuses to employees for meeting financial goals.
P3:-
A.Cost
In business and accounting, cost is the monetary value that a company has spent in order to
produce something. Cost denotes the amount of money that a company spends on the creation
or production of goods or services. It does not include the markup for profit. From a seller’s point
of view, cost is the amount of money that is spent to produce a good or product. If a producer
were to sell his products at the production price, his costs and income would break even,
meaning that he would not lose money on the sales. However, he would not make a profit. From
a buyer’s point of view the cost of a product is also known as the price. This is the amount that
the seller charges for a product, and it includes both the production cost and the mark-up, which
is added by the seller in order to make a profit.
Fixed Cost
A periodic cost that remains more or less unchanged irrespective of the output level or sales
revenue, While in practice, all costs vary over time and no cost is a purely fixed cost, the
concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed
costs are significantly different from those with high variable costs. This difference affects the
financial structure of the organization as well as its pricing and profits. The breakeven point in
such organizations (in comparison with high variable cost organizations) is typically at a much
higher level of output, and their marginal profit (rate of contribution) is also much higher.
Variable Cost
A variable cost is a cost that varies in relation to either production volume or services provided.
If there is no production or no services are provided, then there should be no variable costs.
Direct Cost
A direct cost is a price that can be completely attributed to the production of specific goods or
services. Some costs, such as depreciation or administrative expenses, are more difficult to
assign to a specific product and therefore are considered to be indirect costs.
Indirect Cost
Indirect costs are costs that are not directly accountable to a cost object (such as a particular
project, facility, function or product). Indirect costs may be either fixed or variable, But some
overhead costs can be directly attributed to a project and are direct costs.
Material Cost
Direct materials cost the cost of direct materials which can be easily identified with the unit of
production. For example, the cost of glass is a direct materials cost in light bulb manufacturing.
The manufacture of products or goods required material as the prime element.
Labor Cost
Labor cost is wages that are incurred in order to produce specific goods or provide specific
services to customers. The total amount of labor cost is much more than wages paid. It also
includes the payroll taxes associated with those wages, plus the cost of company-paid medical
insurance, life insurance, workers' compensation insurance, any company-matched pension
contributions, and other company benefits.
Inventory Cost
Inventory cost includes the costs to order and hold inventory, as well as to administer the
related paperwork. This cost is examined by management as part of its evaluation of how much
inventory to keep on hand. This can result in changes in the order fulfillment rate for customers,
as well as variations in the production process flow.
Marginal cost is the cost of one additional unit of output. The concept is used to determine the
optimum production quantity for a company, where it costs the least amount to produce
additional units. If a company operates within this "sweet spot," it can maximize its profits. The
concept is also used to determine product pricing when customers request the lowest possible
price for certain orders.
Absorption Costing System
Variable costing is a methodology that only assigns variable costs to inventory. This approach
means that all overhead costs are charged to expense in the period incurred, while direct
materials and variable overhead costs are assigned to inventory. There are no uses for variable
costing in financial reporting, since the accounting frameworks (such as GAAP and IFRS)
require that overhead also be allocated to inventory.
A job costing system involves the process of accumulating information about the costs
associated with a specific production or service job. This information may be required in order to
submit the cost information to a customer under a contract where costs are reimbursed. The
information is also useful for determining the accuracy of a company's estimating system, which
should be able to quote prices that allow for a reasonable profit. The information can also be
used to assign inventoriable costs to manufactured goods.
Batch cost is the cluster of costs incurred when a group of products or services are produced,
and which cannot be identified to specific products or services within the group. For cost
accounting purposes, it may be considered necessary to assign the batch cost to individual
units within a batch. If so, the total batch cost is aggregated and divided by the number of units
produced to arrive at a unit cost.
A process costing system accumulates costs when a large number of identical units are being
produced. In this situation, it is most efficient to accumulate costs at an aggregate level for a
large batch of products and then allocate them to the individual units produced. The assumption
is that the cost of each unit is the same as that of any other unit, so there is no need to track
information at an individual unit level.
Activity-based costing (ABC) is a methodology for more precisely allocating overhead to those
items that actually use it. The system can be used for the targeted reduction of overhead costs.
ABC works best in complex environments, where there are many machines and products, and
tangled processes that are not easy to sort out. Conversely, it is of less use in a streamlined
environment where production processes are abbreviated.
P4:-
Budget
Budgetary control
A system of management control in which actual income and spending are compared
with planned income and spending, so that you can see if plans are being followed and if
those plans need to be changed in order to make a profit.
Capital Budget
Capital budgeting is the process in which a business determines and evaluates potential
expenses or investments that are large in nature. These expenditures and investments
include projects such as building a new plant or investing in a long-term venture. Often
times, a prospective project's lifetime cash inflows and outflows are assessed in order to
determine whether the potential returns generated meet a sufficient target benchmark,
also known as "investment appraisal."
Operational Budgeting
A detailed projection of all estimated income and expenses based on forecasted sales
revenue during a given period (usually one year). It generally consists of several sub-
budgets, the most important one being the sales budget, which is prepared first. Since
an operating budget is a short-term budget, capital outlays are excluded because they
are long-term costs.
Master Budget
Financial Budget
A financial budget presents a company's strategy for managing its assets, cash flow,
income, and expenses. A financial budget is used to establish a picture of a company's
financial health and present a comprehensive overview of its spending relative to
revenues from core operations. A software company, for instance, might use its financial
budget to determine its value in the context of a public stock offering or merger.
Advantage
Forecasting
A business budget not only helps you project annual expenses but lets you see costs as
they will occur. For example, averaging your insurance premiums per month helps you
set average monthly revenue goals. Budgeting the exact amount of money to pay
premiums in the months they come due helps you manage your cash flow to ensure you
have money on hand to pay your bills each month. Budgets also let you forecast your
annual bottom line using more than one revenue scenario.
Price Setting
Market conditions such as your competitors’ prices aren’t the only parameters you need
to set your fees, rates and prices. You must know your manufacturing and overhead
costs before you set your prices. A budget lets you project your utility, health care,
marketing, rent, wages, debt service and other costs so you can learn the true cost per
unit of making your products or delivering your service. Once you know this, you can set
your prices to make the profit you want. If this price is too high for you to be competitive
in your marketplace, you can use your budget to identify areas where you can reduce
your costs.
Few venture capitalists, banks, suppliers or other lenders will give you money or credit
unless you have financial data to demonstrate you are a going concern. Unless you
have assets you can use as collateral, you’ll need to show financial statements that
prove you are stable. If you are a new business, or are expanding, a budget will show
potential partners how their participation will affect your sales and profits.
Flexibility
A budget lets you track your business’ performance throughout the year, allowing you to
make necessary changes to rein in costs or increase spending to take advantage of
growth opportunities. If your marketing is effective, a budget will let you know if you have
funds available to increase your advertising to grow your sales. If your sales are slow, a
budget identifies areas where you can cut discretionary costs to make you more
competitive or tide you through slow periods.
Disadvantage
The nature of the budget is numeric, so it tends to focus management attention on the
quantitative aspects of a business; this usually means an intent focus on improving or
maintaining profitability. In reality, customers do not care about the profits of a business
– they will only buy from the company as long as they are receiving good service and
well-constructed products at a fair price. Unfortunately, it is quite difficult to build these
concepts into a budget, since they are qualitative in nature. Thus, the budgeting concept
does not necessarily support the needs of customers.
Expense allocations
The budget may prescribe that certain amounts of overhead costs be allocated to
various departments, and the managers of those departments may take issue with the
allocation methods used. This is a particular problem when departments are not allowed
to substitute services provided from within the company for lower-cost services that are
available else where.
Use it or lose it
If a department is allowed a certain amount of expenditures and it does not appear that
the department will spend all of the funds during the budget period, the department
manager may authorize excessive expenditures at the last minute, on the grounds that
his budget manager may authorize excessive expenditures at the last minute, on the
grounds that his budget tends to make managers believe that they are entitled to a
certain amount of funding each year, irrespective of their actual need for the funds.
Time required
Strategic budgeting
This involves identifying new, emerging opportunities, and then building plans to take full
advantage of them. This is closely related to zero based budgeting and helps Kraft to
concentrate on gaining competitive advantage.
Rolling budgets
Given the speed of change and general uncertainty in the external environment,
shareholders seek quick results. US companies typically report to shareholders every
three months, compared with six months in the UK. Rolling budgets involve evaluating
the previous twelve months' performance on an ongoing basis, and forecasting the next
three months' performance.
This examines individual activities and assesses the strength of their contribution to
company success. They can then be ranked and prioritized, and be assigned
appropriate budgets.
d. Approaches budgets
Zero Based Budget
In ZBB the budget for any activity at the start of each year is set at zero. All expenditure
must be justified on a cost/benefit basis, including justification of continuing existence.
Top-Down Approach
It is called top-down approach because the budgets are made by the top executed and
then the money is passed down the line to various departments. This approach is
applied in affordable method percentage of sales, competitive parity method and Return
On Investments (ROI)method of budgeting.
Bottom-up Budgeting
In this method promotion adjectives are set for the tasks to be performed. All the
necessary activities to achieve the objectives are planned. The cost of these activities is
as curtained and budgeted. The total promotion budget is then approved by top
management. This is also knowing the build-up approach of budgeting.
Base Budget
A recurring set of funds provided to a department at the onset of each budget period.
The base budget is used to keep the department functioning, and is derived from the
previous year's spending and adjustments such as inflation. It is not designed to fund
special projects. See also non-base budget.
Incremental Budget
Incremental budgeting is budgeting based on slight changes from the preceding period's
budgeted results or actual results. This is a common approach in businesses where
management does not intend to spend a great deal of time formulating budgets, or
where it does not perceive any great need to conduct a thorough re-evaluation of the
business. This mindset typically occurs when there is not a great deal of competition in
an industry, so that profits tend to be perpetuated from year to year.
e. Pricing
The amount of money charged for product or service, or the sum of value that consumer
exchange for the benefits of having or using the product or service.
f. Pricing Strategy
A business can use a variety of pricing strategies when selling a product or service. The
price can be set to maximize profitability for each unit sold or from the market overall. It
can be used to defend an existing market from new entrants, to increase market share
within a market or to enter a new market.
Types
Price Skimming
Designed to help businesses maximize sales on new products and services, price
skimming involves setting rates high during the introductory phase. The company then
lowers prices gradually as competitor goods appear on the market.
One of the benefits of price skimming is that it allows businesses to maximize profits on
early adopters before dropping prices to attract more price-sensitive consumers. Not
only does price skimming help a small business recoup its development costs, but it also
creates an illusion of quality and exclusivity when your item is first introduced to the
marketplace.
Psychology Pricing
With the economy still limping back to full health, price remains a major concern for
American consumers. Psychology pricing refers to techniques that marketers use to
encourage customers to respond on emotional levels rather than logical ones.
For example, setting the price of a watch at $199 is proven to attract more consumers
than setting it at $200, even though the true difference here is quite small. One
explanation for this trend is that consumers tend to put more attention on the first
number on a price tag than the last. The goal of psychology pricing is to increase
demand by creating an illusion of enhanced value for the consumer.
Penetration Pricing
A few companies adopt these strategies in order to enter the market and to gain market
share. Some companies either provide a few services for free or they keep a low price
for their products for a limited period that is for a few months. This strategy is used by
the companies only in order to set up their customer base in a particular market. For
example France telecom gave away free telephone connections to consumers in order
to grab or acquire maximum consumers in a given market. Similarly the Sky TV gave
away their satellite dishes for free in order to set up a market for them. This gives the
companies a start and a consumer base.
In the similar manner there are few companies that keep their product cost low as their
introductory offer that is a way of introducing themselves in the market and creating a
consumer base. Similarly when the companies want to promote a premier product or
service they do raise the prices of the products and services for that particular time.
Let me first be clear about what value pricing means, value pricing is reducing the price
of a product due to external factors that can affect the sales of the product for example
competition and recession; value pricing does not mean that the company has added
something or increased the value of a product. When the company is afraid of factors
such as competition or recession affecting their sales and profits the company considers
value pricing.
● For example McDonalds the famous food chain has started value meals for their
consumer since they have started facing competition with other fast food chains.
They offer a meal or a combination of a few products as a lower price where the
consumer feels emotionally content and continues to buy their products.
Competitive pricing is one of four major pricing strategies. Other options include cost-
plus pricing, where a set profit margin is added to the total cost of a product -- including
materials, labor and overhead. Markup pricing is where a percentage is added to the
wholesale cost of a product. Demand pricing is determined by establishing the optimal
relationship between profit and volume; a smaller per-unit profit is acceptable if volume
is increased significantly. Competitive pricing is charging a price that is comparable to
other vendors selling the same item.
Factors to Consider
Product prices determine the revenue stream of a business. Prices must be sufficient to
cover the costs of product production, company overhead and profit. Before lowering
prices it's preferable to lower costs to maintain a stable profit margin and a stable cash
flow into the business. Any pricing strategy must be chosen to ensure a maximum of
profit. Knowing your market and customer base are key elements to choosing the right
pricing strategy.
About Competitive Pricing
Vendors use a competitive pricing strategy when several other businesses sell the same
product and there is little to distinguish one vendor from another. A market leader will
generally set the price for the product and other vendors will usually have no option but
to follow suit in order to remain competitive. Vendors will either match the pricing of the
market leader or set prices within a comparable range.
Vendors who are not market leaders can use the accepted price as a starting point.
From there they can opt to charge slightly more on the basis of factors such as superior
customer service or an extended warranty on a product. Retailers must be fully informed
of the prices their competitors charge and also know how discerning their customers are
on price alone. Once price is established, sales volume must be monitored to see if the
strategy is working.
Supply Curve
The quantity of a commodity that is supplied in the market depends not only on the price
obtainable for the commodity but also on potentially many other factors, such as the
prices of substitute products, the production technology, and the availability and cost of
labour and other factors of production. In basic economic analysis, analyzing supply
involves looking at the relationship between various prices and the quantity potentially
offered by producers at each price, again holding constant all other factors that could
influence the price. Those price-quantity combinations may be plotted on a curve, known
as a supply curve, with price represented on the vertical axis and quantity represented
on the horizontal axis. A supply curve is usually upward-sloping, reflecting the
willingness of producers to sell more of the commodity they produce in a market with
higher prices. Any change in non-price factors would cause a shift in the supply curve,
whereas changes in the price of the commodity can be traced along a fixed supply
curve.
decrease in supply
Illustration of an increase in equilibrium price (p) and a decrease in equilibrium
quantity (q) due to a shift in supply (S).
Market Equilibrium
It is the function of a market to equate demand and supply through the price mechanism.
If buyers wish to purchase more of a good than is available at the prevailing price, they
will tend to bid the price up. If they wish to purchase less than is available at the
prevailing price, suppliers will bid prices down. Thus, there is a tendency to move toward
the equilibrium price. That tendency is known as the market mechanism, and the
resulting balance between supply and demand is called a market equilibrium.
As the price rises, the quantity offered usually increases, and the willingness of
consumers to buy a good normally declines, but those changes are not necessarily
proportional. The measure of the responsiveness of supply and demand to changes in
price is called the price elasticity of supply or demand, calculated as the ratio of the
percentage change in quantity supplied or demanded to the percentage change in price.
Thus, if the price of a commodity decreases by 10 percent and sales of the commodity
consequently increase by 20 percent, then the price elasticity of demand for that
commodity is said to be 2.
The demand for products that have readily available substitutes is likely to be elastic,
which means that it will be more responsive to changes in the price of the product. That
is because consumers can easily replace the good with another if its price rises. The
demand for a product may be inelastic if there are no close substitutes and if
expenditures on the product constitute only a small part of the consumer’s income. Firms
faced with relatively inelastic demands for their products may increase their total
revenue by raising prices; those facing elastic demands cannot.
Supply-and-demand analysis may be applied to markets for final goods and services or
to markets for labor, capital, and other factors of production. It can be applied at the level
of the firm or the industry or at the aggregate level for the entire economy.
P5:-
Benchmarking
That might mean tweaking a product’s features to more closely match a competitor’s offering, or
changing the scope of services you offer, or installing a new customer relationship management
(CRM) system to enable more personalized communications with customers.
There are two basic kinds of improvement opportunities: continuous and dramatic. Continuous
improvement is incremental, involving only small adjustments to reap sizeable advances.
Dramatic improvement can only come about through reengineering the whole internal work
process.
Key Benefits
In addition to helping companies become more efficient and profitable, benchmarking has other
benefits, too, such as:
In essence, benchmarking helps employees understand how one small piece of a company’s
processes or products can be the key to major success, just as one employee’s contributions
can lead to a big win.
Key Performance Indicator(KPI)
Often success is simply the repeated, periodic achievement of some levels of operational goal
(e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in
terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies
upon a good understanding of what is important to the organization. [citation needed] 'What is
important' often depends on the department measuring the performance – e.g. the KPIs useful
to finance will differ from the KPIs assigned to sales.
Since there is a need to understand well what is important, various techniques to assess the
present state of the business, and its key activities, are associated with the selection of
performance indicators. These assessments often lead to the identification of potential
improvements, so performance indicators are routinely associated with 'performance
improvement' initiatives. A very common way to choose KPIs is to apply a management
framework such as the balanced scorecard.
Financial governance
NGOs exist for the benefit of their beneficiaries. The NGO’s governing body is entrusted with
responsibility for overseeing the organization on behalf of the beneficiaries. For this reason,
governing body members are often called ‘trustees’. They act as stewards, representing and
protecting the beneficiaries’ interests.
The board has ultimate legal, moral, and financial responsibility for the organization.
The governing body may have different names, such as board of trustees, board of directors,
executive council, executive committee, etc. The board is often organized with a series of
permanent or temporary sub-committees – e.g. for Finance and Personnel matters. Advisory
committees are also frequently set up to provide support to a country programme or new
project.
The five roles of board members
Board members should avoid getting too involved in day to day management of the
organization, although they do need to be aware of what is happening. Their five roles are:
● Making sure that the board can handle its responsibilities effectively
● Ensuring the organization has practical strategies for analyzing and responding to social
problems
● Monitoring if the organization is actually doing a good job, putting its strategy into
practice and achieving value for money
● Approving an annual budget for expenditure, based on the cost of relevant activities
● Making sure that the organization has appropriate internal controls and accounting
systems to ensure that funds are used properly
● Regularly checking that internal controls are followed in practice (e.g. carrying out or
engaging internal audits)
● Taking an active role in internal controls as necessary (e.g. authorizing large payments)
● Regularly monitoring financial reports, including the income and expenditure statement
and the balance sheet
● Monitoring whether the organization is being accountable to its beneficiaries (eg
presenting financial reports to them)
If there is no evidence of dialogue with beneficiaries, then your work may not be meeting
their real needs.
● Actively working out how to ensure the organization will be sustainable, including
approving a financing strategy
● Monitoring relationships with donors (e.g. if reports are submitted on time)
If any fund balances are in negative, this could have serious implications for your credibility.
● Recruiting a chief executive with financial management skills for their role (or
supporting the Chief Executive to develop these skills)
● Supporting the Chief Executive to develop a culture of good financial management (e.g.
leading by example and encouraging finance and programme staff to work together)
● Making sure that the most senior finance manager is a member of the most senior
management team
● Encouraging an open culture that recognizes problems and aims to learn from them
● Holding senior managers to account for the results of the decisions that they take and
the initiatives they launch
Everything you want to achieve depends on the people employed to do it. Senior managers
have to inspire and support other staff.
● Understanding the NGO's legal requirements, including Labour laws, Tax laws and
Health & Safety legislation.
● Making sure that the management team meets legal requirements (e.g. paying taxes,
filing annual reports).
● Appointing external auditors and overseeing the audit.
● Appointing a treasurer, with specific responsibilities for financial management and the
skills to carry them out.
● Making sure that all board members understand their financial management
responsibilities and supporting them to develop appropriate skills.
● Making sure there are no conflicts of interest between the organization’s operations and
board members' work or business interests
● Making time at board meetings to discuss the financial management aspect of all major
decisions.
● Mango has a one-day training course called Financial governance in practice, which can
be run as an in-house event for your board.
The competencies required to envision the future, measure performance, and report
financial results.
● Decision Making
The competencies required to guide decisions, manage risk, and establish an ethical
environment.
● Technology
● Operations
The competencies required to contribute as a cross-functional business partner to transform
company-wide operations.
● Leadership
The competencies required to collaborate with others and inspire teams to achieve
organizational goals.
● Competence
Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
Provide decision support information and recommendations that are accurate, clear,
concise, and timely.
● Confidentiality
Inform all relevant parties regarding appropriate use of confidential information. Monitor
subordinates' activities to ensure compliance.
● Integrity
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Abstain from engaging in or supporting any activity that might discredit the profession.
● Credibility
How can these skills be used to prevent and/or deal with financial problems
Cutting out an expense or changing a habit is easier if you replace it with something else. For
instance, if you want to quit buying expensive coffee on your way to work, plan how you can
replace this habit with a new one. You might buy yourself a new travel cup and purchase some
coffee that you enjoy drinking (and can make at home!). Then change your routine so that
you’re not tempted to stop for coffee anyways.
Find one expense that’s taking a real bite out of your budget and find replacement solutions.
Cutting back on coffee is just one example. What about your entertainment costs, quitting
smoking or scaling back what you spend on hobbies and recreational activities? You’ll know that
you’ve passed this assignment when all of your bills are paid up to date and you’ve got a little
extra left in your bank account.
Identify Expenses You Can Reduce
Over the next month, identify areas of your budget that need some special attention. Look for
ways to decrease your spending with your utilities. Do your laundry with cold water instead of
hot; turn the heat down and the lights off when you’re not home. If you have a home phone as
well as a cell phone, decide if you need both. Routines can be hard habits to break.
Also identify products or services you no longer need but which you’re still paying for. Many
people simply let their bundled services renew from month to month, even when their needs
have changed. This might be because they’re too busy to look at their bills carefully, but taking
the time to go through your bills line by line and calling the companies to make changes to
service plans, or cancel services altogether, can find a lot of hidden cash.
If you haven’t guessed it yet, your fifth assignment is to identify what expenses you can reduce
and then create the plan to follow through with your changes. If you’re not sure where to start,
here’s a list of our most popular money saving tips. You’ll know you’ve passed this when your
bills get a little smaller.
Consider what you learned about your spending habits by only using cash. Was it easier or
harder to part with cash than plastic? Did you only buy things you needed, or was there also
enough money to buy something that you wanted? How much did you have left at the end?
Some cases have found that people spend as much as 15% more per purchase when they use
plastic instead of cash. Spending more on every purchase adds up over the years, and if you
want debt solutions that last for life, be aware of how you spend your money.
Creating a monthly plan for your spending is one of the smartest things you can do for your
finances, yet it’s the most overlooked solution to most people’s financial problems. Having a
spending plan or a budget (the technical name for a monthly spending plan) makes life so much
easier because you’ve given yourself a guide to decide how you want to spend your money.
Ironically, it’s also one of the things that you’ll likely never learn in a class at Cambridge or
Harvard. Not to pick on these universities though; most schools don’t teach students how to
create a budget. So to help with this lack of training, your third assignment is to outline your
budget.
If you’ve never created a household budget that works, here is a personal budget workbook to
get you started or you can try out this interactive budgeting resource that guides you through the
whole process. A budget based on real numbers sets you up for success, so use what you
learned when you tracked your spending.
If there’s an expense you want to cut out of your budget, start by reducing it by half. This will tell
you if you can stick it out for the long term. If you can make having a budget part of your life.
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