Budget Analysis of Famished Limited - Assignment Example

The Managing Director A.M. Project Manager Budget Analysis of Famished! Limited Report Table of Contents 0 Terms of reference 2.0 Budgeting 3.0 Ratio analysis 4.0 Breakeven analysis 5.0 Sensitivity analysis 6.0 Conclusion Appendices References 1.0 Terms of reference This report provides various budgets for the first year of operations of Famished Ltd. It also provides projected income and financial position statements which indicated the projected profitability and financial position of the company after a year. Ratio analysis and sensitivity analysis is also used to show how the figures would change if revenues declined by 20%, if one less server and assistant is employed and if the monthly advertising costs increased by 50%. Breakeven analysis of the results has also been prepared to determine the volume of sales at which the company will be able to cover its fixed costs. There are a number of financial tools and techniques available to assist business managers to monitor and control their operations. They include budgeting, ratio analysis, breakeven analysis and sensitivity analysis. 2.0 Budgeting Budgets are useful methods of monitoring and controlling costs and organisations prepare a number of them in order to monitor and control expenditure. They include revenue budget, material budget, labour budget, cash budget, budgeted income statement, and budgeted financial statements. The revenue budget is normally the first budget to be prepared. The revenue requirements are determined and a forecast is done of the revenues that the company will generate over a period and when the actual amounts will be received (See Appendix A). The material budget and the labour budget is then prepared based on the information in the revenue budget. These budgets indicate the cost of materials that are required in each period in order to achieve the targeted revenues. The material budget indicates when materials are purchased and the quantity in which they are purchased (See Appendix B). The labour budget includes a description of the labour required and the cost of labour for each period included in the budget. A cash budget is then produced based on the information in the revenue budget, material budget and labour budget (See Appendix C). The cash budget includes a section for inflows (receipts) and another for outflows (payments) (See Appendix D). The receipts in the cash budget are linked to information in the revenue budget and the payments are linked to information in the materials budget and the labour budget. The revenue, material, labour and cash budgets are shown in Appendix A, B, C and D. In order to forecast the total income, expenditure and profits for the period a projected income statement is prepared. This statement draws cumulative information from the revenue budget, the material budget, the labour budget and the cash budget. The projected retained earnings from the projected income statement is then used in the preparation of the forecast balance sheet along with capital items in the cash budget, prepaid and unpaid expenses which are determined by comparing the information in the income statement with the cash budget. The projected income and financial position statements are shown in Figure 1 and 2 respectively. Famished! Limited Forecast Income Statement for the year ending March 31, 2012 ? ? ? Gross sales revenue 592,000 Less direct material costs after deduction of closing inventory 124,320 Gross margin 467,680 Less expenses: Lease 24,000 Refit depreciation 7,000 Equipment depreciation 5,148 Business rates 24,300 Water 1,712 Electricity 4,508 Gas 6,050 Internet for business use 360 telephone 909 Cleaning 10,944 Promotional expenditure 600 Salaries 241,661 327,191 Operating profit 140,489 Interest payable 902 Retained profit 139,587 Figure 1 Famished! Limited Projected STATEMENT OF FINANCIAL POSITION as at March 31, 2012 ? ? ? Non current assets Cost Dep'n Net Refit of premises 35,000 7,000 28,000 Equipment 28,600 5,148 23,452 51,452 Current assets Inventories 1,800 Receivables 3,600 Prepayments: Internet 0 Lease deposit 6,000 Lease prepayment 6,000 Cash at bank 85,750 Cash float in till 300 103,450 154,902 Financed by: Ordinary Shares: 12,000 ?0.50p 6,000 Retained earnings 139,587 145,587 Current liabilities Payables 6,300 Accruals: Electricity 383 Gas 508 Business landline 78 Cleaning 1,116 Water 730 Advertising 200 9,315 154,902 Figure 2 3.0 Ratio analysis Ratio analysis is also a means of monitoring and controlling the operations of the business. Figure 3 shows profitability ratios - gross profit to sales and operating profit to sales; an efficiency ratio – return on investment (ROI); and liquidity ratios- current and quick ratios. The ratios indicate that Famished Ltd is a profitable business with gross profit to sales and operating profit of 79% and 24% respectively. The ROI indicates that the management at Famished Ltd has utilised the company’s operating assets effectively and efficiently thus generating a return of 147%. Famished will be able to meet short term obligations with current ratio and quick ratio of 11 and 10 respectively. The benchmark for the current and quick ratios are 2 and over and 1 and over respectively (BPP 2009). Ratios GP:S 79.0 OP:S 23.7 ROI 148.3 CA/CL 11.14 Acid test 10.95 Figure 3 – Calculation of ratios 4.0 Breakeven Analysis Horngren et al (200, p. 883) defines breakeven (B/E) point as the quantity of output where total revenue and total costs are equal (2000, 883). That is where operating income is equal to profit. The number of meals and the gross revenue required for the business to breakeven is shown in the table below. Av revenue 6.15 VC/meal 1.29 Contribution 5 FC 327,191 BEQ 53,202 Gross revenue 592,000 Number of meals served 96,260 Variable Cost 124,320 In the first year of trading the business is required to sell 53,202 meals to breakeven. This figure is calculated using the following formula: B/E = Fixed Cost/unit price (Av revenue) When the figures for fixed cost (?327,191) and unit price for each meal (?6.15) are substituted in the formula the result is the breakeven quantity. The gross revenue for breakeven in the first year is found by multiplying the breakeven quantity (53,202) by the unit price of each meal (?6.15). The figure is ?327,191 which is the fixed cost. Therefore the gross revenue to breakeven is that which will cover fixed cost. 5.0 Sensitivity analysis The information in Appendix A to F also provides information resulting from sensitivity or ‘what if analysis’. They indicate how the revenue budget would change if revenues decline by 20%, how the labour budget would change if one less server and assistant is used from June 2012, and how the cash budget would change if advertising increased by 50% starting October 2012. Sensitivity analysis would therefore indicate the impact that these changes would have on the income and financial position statements. 6.0 Conclusion These tools are very useful and Famish Ltd should therefore utilise them in the financial management of the business. Appendix A Famished Subsidiary Revenue budget for the period April 1, 2011 to march 31, 2012 May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar 0 59,840 77,440 95,040 84,480 36,960 42,240 45,760 31,680 21,120 26,400 0 8,160 10,560 12,960 11,520 5,040 5,760 6,240 4,320 2,880 3,600 0 68,000 88,000 108,000 96,000 42,000 48,000 52,000 36,000 24,000 30,000 0 592,000 Revised May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar 0 47,872 61,952 76,032 67,584 29,568 33,792 36,608 25,344 16,896 21,120 0 6,528 8,448 10,368 9,216 4,032 4,608 4,992 3,456 2,304 2,880 0 54,400 70,400 86,400 76,800 33,600 38,400 41,600 28,800 19,200 24,000 0 473,600 Appendix B Famished Subsidiary Materials budget for the period April 1, 2011 to March 31, 2012 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Sales revenue 68,000 88,000 108,000 96,000 42,000 48,000 52,000 36,000 24,000 30,000 Balance at start of month 0 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 6,300 Materials purchased 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 6,300 126,120 Payments 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 6,300 Balance at end of month 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 6,300 Revised Materials budget 2,012 2,013 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Sales revenue 54,400 70,400 86,400 76,800 33,600 38,400 41,600 28,800 19,200 24,000 Balance at start of month 0 12,864 14,784 18,144 16,128 7,056 8,064 8,736 6,048 4,032 5,040 Materials purchased 12,864 14,784 18,144 16,128 7,056 8,064 8,736 6,048 4,032 5,040 100,896 Payments 12,864 14,784 18,144 16,128 7,056 8,064 8,736 6,048 4,032 5,040 Balance at end of month 12,864 14,784 18,144 16,128 7,056 8,064 8,736 6,048 4,032 5,040 Appendix C Famished Subsidiary Labour budget for the period April 1, 2011 to March 31, 2012 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Manager 3,056 3,056 3,056 3,056 3,056 3,056 3,056 3,117 3,117 3,117 Supervisors 5,501 5,501 5,501 5,501 5,501 5,501 5,501 5,611 5,611 5,611 Servers 8,435 8,435 8,435 8,435 8,435 8,435 8,435 8,604 8,604 8,604 Assistants 7,029 7,029 7,029 7,029 7,029 7,029 7,029 7,170 7,170 7,170 Totals 24,022 24,022 24,022 24,022 24,022 24,022 24,022 24,502 24,502 24,502 241,661 Labour budget REVISED 2,012 2,013 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Manager 3,056 3,056 3,056 3,056 3,056 3,056 3,056 3,117 3,117 3,117 Supervisors 5,501 5,501 5,501 5,501 5,501 5,501 5,501 5,611 5,611 5,611 Servers 6,601 6,601 6,601 6,601 6,601 6,601 6,601 6,733 6,733 6,733 Assistants 5,501 5,501 5,501 5,501 5,501 5,501 5,501 5,611 5,611 5,611 Totals 0 20,660 20,660 20,660 20,660 20,660 20,660 20,660 21,073 21,073 21,073 207,840 Appendix D Famished Subsidiary Cash Budget for the period April 2012 to March 31 2012 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Total IS Receipts Gross cash sales 0 0 59,840 77,440 95,040 84,480 36,960 42,240 45,760 31,680 21,120 26,400 520,960 Receivables 0 0 0 8,160 10,560 12,960 11,520 5,040 5,760 6,240 4,320 2,880 67,440 3600 Other 0 Parent company 6,000 6,000 ST 6,000 0 59,840 85,600 105,600 97,440 48,480 47,280 51,520 37,920 25,440 29,280 594,400 Payments 0 Lease deposit 6,000 6,000 6,000 6,000 6,000 30,000 (6000) Lease quarterly payment 6,000 6,000 Refit payments 14,000   14,000 28,000 Refit retention 7,000 7,000 Equipment 28,600 28,600 Business rates 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 24,300 Water 138 844 982 730 Electricity 365 365 365 365 365 383 383 383 383 383 383 4,125 383 Gas 492 492 492 508 508 508 508 508 508 508 508 5,542 508 Business telephone 75 75 75 75 75 75 75 75 75 78 78 831 78 Internet for business use 30 30 30 30 30 30 30 30 30 30 30 30 360 0 Cleaning 1,080 1,116 1,116 1,080 1,116 1,080 1,080 1,116 1,044 9,828 1116 Promotional expenditure 200 200 400 200 Salaries 24,022 24,022 24,022 24,022 24,022 24,022 24,022 24,502 24,502 24,502 241,661 Interest 221 257 417 7 902 Cash float 300 300 Material payables 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 119,820 ST 28,055 3,646 75,866 44,586 46,628 63,821 48,283 37,823 44,203 39,524 36,403 39,811 508,650 The cash budget Balance at start of month 300 (22055) (25701) (41726) (713) 58259 91878 92074 101531 108848 107244 96281 Receipts 6000 0 59840 85600 105600 97440 48480 47280 51520 37920 25440 29280 Payments 28055 3646 75866 44586 46628 63821 48283 37823 44203 39524 36403 39811 Balance at end of month (22055) (25701) (41726) (713) 58259 91878 92074 101531 108848 107244 96281 85750 Revised Portion Famished! Lmited REVISED Cash budget for the period April 1, 2011 to March 31, 2012 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Receipts Gross cash sales 0 0 47,872 61,952 76,032 67,584 29,568 33,792 36,608 25,344 16,896 21,120 416,768 Receivables 0 0 0 6,528 8,448 10,368 9,216 4,032 4,608 4,992 3,456 2,304 53,952 2880 Other 0 Parent company 6,000 6,000 ST 6,000 0 47,872 68,480 84,480 77,952 38,784 37,824 41,216 30,336 20,352 23,424 476,720 Payments 0 Lease deposit 6,000 6,000 6,000 6,000 6,000 30,000 (6000) Lease quarterly payment 6,000 6,000 Refit payments 14,000   14,000 28,000 Refit retention 7,000 7,000 Equipment 28,600 28,600 Business rates 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 2,025 24,300 Water 138 844 982 730 Electricity 365 365 365 365 365 383 383 383 383 383 383 4,125 383 Gas 492 492 492 508 508 508 508 508 508 508 508 5,542 508 Business telephone 75 75 75 75 75 75 75 75 75 78 78 831 78 Internet for business use 30 30 30 30 30 30 30 30 30 30 30 30 360 0 Cleaning 1,080 1,116 1,116 1,080 1,116 1,080 1,080 1,116 1,044 9,828 1116 Promotional expenditure 300 300 300 300 300 1,500 300 Salaries 20,660 20,660 20,660 20,660 20,660 20,660 20,660 21,073 21,073 21,073 207,840 Interest 221 257 503 232 1,213 Cash float 300 300 Material payables 16,080 18,480 22,680 20,160 8,820 10,080 10,920 7,560 5,040 119,820 ST 28,055 3,646 72,504 41,310 43,491 60,459 44,922 34,762 41,142 36,395 33,074 36,482 476,240 The cash budget Balance at start of month 300 (22055) (25701) (50333) (23163) 17826 35319 29181 32244 32318 26259 13537 Receipts 6000 0 47872 68480 84480 77952 38784 37824 41216 30336 20352 23424 Payments 28055 3646 72504 41310 43491 60459 44922 34762 41142 36395 33074 36482 Balance at end of month (22055) (25701) (50333) (23163) 17826 35319 29181 32244 32318 26259 13537 480 Appendix E Formulae Revenue budget calculations Cash Sales = 88% of Sales for the month Credit Sales = 12% of the Sales for the month Material budget calculations Materials purchased 1st Month = 21% of Total Sales for the month plus stock buffer of ?$1,800 Materials purchased all other months = 21% of Total sales for the month Payments in each month = the previous months materials purchased figures The balance owing at the end of each month = the current month’s materials purchased figure Labour budget calculations Labour cost per category to Dec 2011= labour cost pa ? respective FTE ? 1.29 Labour cost per category Jan to Mar 2012 = (labour cost pa ? FTE x 1.29) ? 1.02 Cash budget calculations Gross cash sales = cash sales for the relevant month (from revenue budget) Receivables = credit sales for previous month (from revenue budget) Parent company = $6,000 used for rental deposits which is to be used for investment in shares Lease deposit = one off deposit in April consisting of the rent for one quarter Lease payments = quarterly payments paid on April one in the first quarter and by the last day of the previous quarter in all other instances Refit payments = (?35,000 – (20% of 35,000) )/8 = ?3,500 per wk for 8 wks or ?14,000 per mth for 2 mths Refit retention = 20% of ?35,000 = ?7,000 Business rates = ?24300/12 = ?2025 Water paid in May = $138 owing for April 2011 paid in May 2011 Water paid in November $138 ? 4 months (May to Aug) + ?146 x 2 months (Sept to Oct)= ?844 Electricity paid in month = rate for previous month Gas paid in month = rate for previous month Cleaning paid in month = rate for previous month ? number of days in month Promotional expenditure = rate for previous month Salaries = salaries for month (from labour budget) Interest = 1% of bank balance for the previous month Income Statement calculation Gross sales revenue = total sales from revenue budget Direct material = Total of material purchased from labour budget - $1,800 Lease = Lease due for 12 months @ ?2,000 per month Refit depreciation = 20% of ?35,000 Equipment Depreciation = 20% of ($28600 x 80%) = ?5148- Business rates = rate per month ? number of months Water = rate per month ? number of months Electricity = rate per month ? number of months Gas = rate per month ? number of months Internet of business use = per month ? number of months Business telephone = per month ? number of months Cleaning = per month ? number of months Promotional expense = per month ? number of months Salaries = Total from labour budget Operating profit = Gross margin less Operating expenses Interest Payable = notional interest from cash budget Retained earnings = Operating profit – Interest payable Statement of Financial Position calculation Cost of non current assets = totals from cash budget Depreciation = relevant figures from income statement Inventories = buffer stock of $1,800 Accounts receivables = credit sales for March 31st 2012 Lease deposit = figure from cash budget Lease prepayment = March 2012 payment for April 2012 to June 2012 Cash at bank = Balance at end of March 2012 in cash budget Cash float = amount in total column Ordinary shares is amount paid for lease deposit = 12000 x ?0.50 Retained earnings = taken from income statement Electricity = amount in cash budget + amount accrued Gas = amount in cash budget + amount accrued Business landline = amount in cash budget + amount accrued Cleaning = amount in cash budget + amount accrued Water = amount in cash budget + amount accrued Advertising = amount in cash budget + amount accrued Water owing for the year A References BPP Learning Media. (2009). ACCA F7: Financial Reporting. 3rd London: BPP Learning Media Horngren, C.T., Foster, G and Datar, S.M. (2000). Cost Accounting: A Managerial Emphasis. 10th ed. New Jersey: Prentice Hall Read More