Davis Service Group is a large public limited company employing around 17,000 people. Its shares are quoted on the London Stock Exchange. Davis operates across 15 countries and has sales turnover of over 1 billion. To meet its needs, the company has developed a robust and detailed budgeting and planning process involving its managers. Budgeting provides an essential forecasting, control and feedback system on which effective management depends. This process translates competitive strategy into reality. Budgeting involves making detailed financial plans for every aspect of the business, identifying risks and ensuring that managers are committed to the outcomes that they have agreed. Despite the severe recession of 2008-09, Davis continued to be a profitable company. This has been the result of careful budgeting. Davis uses budgets to plan the future use of its resources, either in the short or long term.

This case study shows how the development and use of budgets contribute to Davis Service Group meeting its objectives.

Davis Service Group is careful to set budgets in consultation and not to impose them on the different parts of the business. In this way, managers at all levels feel involved in the process and are more likely to feel motivated to achieve the targets in their budgets. Managers use sensitivity analysis to review different scenarios. They ask questions and consider the impacts of various alternatives (the "what-ifs"). For example:

The economic outlook - What is the overall economic trend for the UK and Europe? For example, increased redundancies during a recession would mean less demand for work wear. A sharp rise in the value of the euro against the British pound would make earning from Davis" European business more valuable to the company

Competition - What is the likely strategy of key competitors? Is there a risk of any new entrant to the market or an existing competitor leaving the market?

Customers -How are customer needs likely to change? Will demand from the hospital sector grow more than that from hotels and restaurants?

Staff -Is the company recruiting sufficient staff? Are salaries high enough to keep vital knowledge and experience within the Group or does Davis need to recruit additional expertise?

Suppliers What is happening in supplier markets? For example, what will be the effect of Far East imports on prices of workwear? What is the impact of increases or reductions in utility prices (energy and water)? How will exchange rates affect costs?

Davis Service Group often constructs two or three possible scenarios so it can analyze the effects of favorable and less favorable outcomes on the business. Managers are responsible for their budget variances and would need to report on outcomes and propose action to their own manager. A key task of managers is to watch for variances that are unexpected, either in their size or timing, and take action accordingly. Managers generally focus their energy on these 'exceptions'. Adverse variances prompt investigation into what has gone wrong. They may suggest:

• unrealistic budgeting; budget data may need to be revised or flexed
• a failure with part of the process (e.g. missed targets by sales force); this needs immediate management attention
• a change in the external environment (e.g. a new competitor); this might require a counter-attack with an increased marketing budget

Budgets use resources so they are closely linked with key performance indicators (KPIs). KPIs help to evaluate the overall performance of the business. Davis Service Group's KPIs include measurement of:

• organic revenue growth (i.e. sales growth excluding acquisitions)
• operational throughput (e.g. tonnage of linen processed)
• management retention rate (i.e. keeping experienced staff in the company)
• health and safety records (e.g. major incident injury rate)
• Environmental performance (e.g. water and energy consumption).

As with the budget, action is prompted through variance from the KPI. For example, if a plant's environmental performance has worsened, does it require additional investment in equipment? If health and safety incidents have increased, do employees need more training?

You are required to read and analyze the above case scenario, make a presentation with the help of power point slides covering following questions:

Part A:

1. Why was Davis & Co. not affected by the recession of 2008-09? Give reasons
2. What kind of approach does the company adopt for preparing budgets? Explain
3. Mention the different assumptions / criteria considered by the managers while forecasting the budget estimates?
4. Which are the two different scenarios which indicate that the company prepares flexible budgets based on different assumptions?

Part B:

1. What does adverse variances indicate to the management? Cite examples
2. Who is responsible for budget variances and how are the unfavorable variances investigated and the corrective actions taken?
3. What do you understand by KPI's? How does Davis Service Group set KPI's for measuring budget performances? Illustrate.

Part C:

Consider your work in finance team and you have been requested to present a brief report to management committee on role of budgeting (use points from Part A and B) and its importance on the business performance to Davis Service Group (each group member must share the presentation work).