Managing Financial Resources: Starbucks Corporation

Budget, Planning, Cost, and Ratio Analysis: The Context of Starbucks

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Introduction

Cost effectiveness should be considered as pivotal in the context of budgeting which ensures that the return on investment (ROI) is higher both in the short and long run. The role of cost in the process of decision making, from the business profitability perspective, is of utmost importance as businesses strive to remain profitable through being cost effective in the context of decision-making. In this respect, Starbucks’ ratio analysis in the course of budgeting decision making deserves special mention because the global leader in coffee retail chain has continued to experience success run in allocating a rational budget that has helped Starbucks’ business flourish worldwide. Considering the importance of cost and ratio analysis in the context of effective business decision making, this report will focus on the benefits and limitations experienced by Starbucks in the course of remaining cost-effective in terms of production and in the sphere of its business operations. The report will discuss the role of cost in the process of decision making and the ratio analysis approach adopted by Starbucks and then it will continue to discuss the benefits and limitations of the process of budgeting and planning as embarked on by Starbucks in specific in the course of remaining profitable.

Role of Cost in the Process of Decision Making

Cost management is essential to be effectively performed by any business that strives to remain profitable in the long run. Cost management and decision making together play a crucial role in enhancing the overall performance of a business in any given sector. Effective cost analysis is essential for a business to position itself profitably in a market and sustain the market hold for a longer term. Mangers must embark on the process of careful cost analysis to help businesses and their top management determine the total cost that is essential to ascertain to determine how a business can remain profitable in the long run. In this respect, it has to be noted that effective management of cost through efficacious analysis of the overall cost incurred by a business can help a business organization govern its actions and track its budget in a way that ensures refraining from over budget and budget constraints. It has been observed that effective cost analysis and cost management decision making propel a drive towards creating higher business value out of business processes and operations which has the potential to provide profitability to a business without incurring higher cost, ensuring that business processes are productive over a longer period of time remaining aligned with the goals and objectives of the business.

It has been observed that Starbucks continues to put much emphasis on cost analysis to make sure that higher output is attained with moderate input, ensuring business profitability through making sure that the return on investment (ROI) is always high. Starbucks has continued to demonstrate higher inclination towards sustaining a cost information system management that has helped Starbucks in making effective and rational business decisions (Lepadatu, 2011). In this respect, it becomes noteworthy that cost analysis in the course of decision making has helped Starbucks in gaining better control over its operations, processes, and ultimately on budget (Lepadatu, 2011). In this regard, it has to be noted that even though there are several controls that are essential for a business to have in order to sustain profitability; cost control and cost analysis always play a vital role in sustaining the buoyancy of a business during any type of crisis. Production control, quality control, and stock control, all are important in the context of business profitability, but cost analysis is also essential to perform for determining if the budget approach of a business is rational or not in sync with the need of the situation and the market. This mantra has been thoroughly followed by Starbucks in the course of outperforming its competitors both in the short and long run.

Starbucks’ Ratio Analysis

Apart from cost analysis and determining cost effectiveness in the course of business decision making, Starbucks give more importance in different types of ration analysis. Starbucks relies largely on operating leases that can be considered as off-balance-sheet obligations that have to be carried through maintaining a substantial amount of debt (Blokhin, 2021). In this respect, to ensure business profitability and to make sure that the business has the potential to survive amidst crises, Starbucks has continued to perform ratio analysis, including fixed-charge coverage ratio, operating margin ratio, debt/equity ratio, net margin ratio, return on equity (ROE) ratio, and the ratio of return on investment and capital (Blokhin, 2021). Starbucks has always preferred to analyse its financial ratios in the course of business decision making for the purpose of improving and sustaining its improved financial standing and position within an industry which is characterized by stiff competition. Ratio analysis is also important for Starbucks to perform in order to properly evaluate its revenues and output generated in the course of conducting business. Moreover, Starbucks also has continued to perform short-term (operating) activity ratios to determine if the short-term business objectives and financial goals are accomplished.

Benefits and Limitations of the Process of Budgeting and Planning

Starbucks has continued to reap the benefits and face the limitations of the process of budgeting and planning. Starbucks, through proper business planning and budgeting has been able to communicate its corporate goals to the stakeholders effectively, making them aware of potential problems that need to be overcome to sustain profitability in the long run (MBA Knowledge Base, 2021). Moreover, budgeting and planning is needed on the part of any business to coordinate its different segments and departments, and in this respect, Starbucks is no exception (MBA Knowledge Base, 2021). Besides, it has to be noted that effective budgeting and planning can provide a business organization with the scope of evaluating its actual performance by determining if the input and the output are in sync with the financial targets, goals, and objectives of the concerned business. But quite often it has been observed that budgeting can mislead a business and its performance in the long run. In this respect, it has to be taken into account that budgeting may overstate projections, signalling wrong apprehensions that can put a business at risk of developing false financial alarms that unduly and unnecessary make stakeholders worried about the return on investment (ROI). Moreover, it has been observed that budgeting often compels Starbucks to stick to some confinements that are needed to ensure profitability, thereby, alleviating creativity and innovation, which, in turn, can hamper the chances for a business to gain the competitive edge in the long run.

Conclusion

Considering the importance of cost and ratio analysis in the context of effective business decision making, this report focused on the benefits and limitations experienced by Starbucks in the course of remaining cost-effective in terms of production and in the sphere of its business operations. The report discussed the role of cost in the process of decision making and the ratio analysis approach adopted by Starbucks and the benefits and limitations of the process of budgeting and planning as embarked on by Starbucks in specific in the course of remaining profitable. It has been found that Starbucks has continued to demonstrate higher inclination towards sustaining a cost information system management that has helped Starbucks in making effective and rational business decisions both in terms of budgeting and profitability.

References

Blokhin, A. (2021). Starbucks’ 6 Key Financial Ratios (SBUX). https://www.investopedia.com/articles/markets/111015/starbucks-6-key-financial-ratios.asp

Lepadatu, G. (2011). The Importance of the Cost Information in Making Decisions. Romanian Economic Business Review, 6(1), 52-66.

MBA Knowledge Base. (2021). The Benefits and Limitations of Budgets. https://www.mbaknol.com/business-finance/the-benefits-and-limitations-of-budgets/