Planning and Control of Budgeting for Small Businesses

In a few words, explain how the owner of babycakes and his business will benefit from having a realistic budget as opposed to having no budget at all. There is a saying that "If you fail to plan you are planning to fail". A realistic budgeting will benefit Babycakes company because a budget can help the business owner spend efficiently. For a business like Babycakes to grow, there must be an effective budgeting in order to keep basic record of every financial encounter and transaction to enable proper growth of the company. Budget can act as an early warning system; by comparison, of planned and real spending and profits she can catch changes in the customers’ or partners behavior. The budget can also help to see overproduction and therefore diminish the waste of sources for production of unpopular products. In addition, with the budget, the owner can evaluate future performance based on the aggregated data about past transactions and revenues/ costs of products or results in particular holidays. Finally, it is possible to motivate employees adding progressing figures to the budget and relating the growth of sales with their salary and bonuses (Ionescu and Bîgioi, 2016).

2) Prepare a sales budget for the LA Babycakes store for the 4th quarter of 2016. Present the number of units, sales price, and total sales for each month; include October, November, and December, and a total for the quarter. Use one-half of the Valentine’s Day sales as the basis for a usual day in the new quarter. Use 30 days for each month. Calculate the total sales for each month for October, November, and December.

The Valentine’s Day sales equal 1500 units, therefore sales per month are 1500/2 *30 = 22500 units. Sales per quarter in units are 22500*3 = 67500. Total sales per month are 22500*3.5 = $78750 and three times more for the quarter ($236250). The structured budget presented in the table below:

3) Create three (3) new products, one (1) for each of the three (3) holiday seasons in the 4th quarter. Estimate the sales units, sales price, and total sales for each month. Describe the assumptions used to make these estimates. Include an overview of the budget in the report, presenting the actual budget as an appendix with all data and calculations. Add these amounts to your sales budget.

New products for holiday seasons relate to these holidays’ thematic, in their recipes and design Babycakes will use traditional products and symbols. For Halloween, the bakery will present customers new pumpkin cupcakes with a recognizable sweet flavor of this ingredient. For Thanksgiving Day Babycakes plan to introduce apple pie donuts that are donuts but with a flavor of apple pie and similar decoration. Finally, for the Christmas Day, the bakery provides donuts in a form of Christmas tree with similar decoration.

The sales price for every item in this special holiday products is $4 per unit, the price is based on special ingredients and decoration used in products that are more expensive than usual ones. However, estimation of required amounts of cupcakes for these holidays is different due to their popularity among different groups of the population.

An amount for Halloween is the same as for St. Valentine as this holiday is popular among the same young people and have the same mostly commercial nature. For Thanksgiving Day and Christmas, amounts are higher as these holidays are family celebrations and more sweets required for children and all members of bigger families.

Adding these figures to the previous budget getting:

Here units for Halloween and Thanksgiving added to November figures and Christmas units added to December figures. The same operation is done for total sales. To count sales price used a weighted average, for example for November the sales price is:

(22500*3.5 + 6000*4 + 8000*4)/ 26000 = 3.57 $ per unit.

For December the sales price is:

(22500*3.5 + 8000*4)/ 24500 = 3.54 $ per unit.

Totals for quartier are just sums of new monthly figures.

4) The owner of Babycakes is interested in preparing a flexible budget rather than the static budget she currently uses. She does not understand why, when sales increase, her static budget often shows an unfavorable variance. Explain how a flexible budget will overcome this problem. Use the details of your newly prepared budget for the 4th quarter of 2016 to address her concern.

The possible reason for the unfavorable variance in the case of increasing sales is not the proportional growth of expenditures in the response of those sales. For example, it may require extra hours of employees work or faster transportation by suppliers that cost more than average work hours and transportation.

Flexible budget in its simplest form is a budget where expenses vary with revenues. The relation between revenues and expenses mostly bases on variable expenses (labor, materials, and ingredients) and most of the time is the same (Rachita, Diaconescu, and Mazga, 2016). However, growing sales over some limit may lead to not proportional changes and unusual expenses like in discussion above.

In particular, in the newly prepared budget for the 4th quarter including holidays sales, there are adjusted prices for ingredients that mean in the budget expenditures for special cupcakes will be also higher than initially. In a flexible budget for Babycakes, its owner will be able to see automatically adjusted expenditures and revenues when sales increases (Radu and Giju, 2015).

5) Imagine that Babycakes is facing a financial challenge that is causing the actual amount of money that it spends to become significantly more than its budgeted amount. Include a discussion of your own unique case of the overspending Explain the corrective actions needed to address these challenges.

In a case of overspending, there is a possibility of a shortage of liquidity in the next periods, therefore company budgets require adjustments and recalculation of cash-flows taking in account new inflows to cover the gap. Among financial services, for this problem, an opportunity to borrow short-term money from bank exists (the service of cash-management); however, this service cost additional interest. The reasonable action is an investigation of overspending reasons and in a case, there is a particular source of overspending (person, but not an owner) it is possible to charge the employees for the part of the amount. In my practice, the case of overspending has been related to usage of company money for personal purposes by one of the top managers. To correct overspending on the level of documentation and budgets should be done changes to the next periods' budgets, for example, planned outflows to cover money the company borrowed or inflows by the charged employee.

References

Ionescu, A. M., & Bîgioi, C. E. (2016). Performance management through budgets. Drafting and launching the company’s sales budget. Audit Financial, 14(139), 789-799.

Kotsiovos, J. (2016). Competencies of Successful Small Restaurant Owners: An Exploratory Study (Doctoral dissertation, Northcentral University).

Rachita, U., Diaconescu, T., & Mazga, A. (2016). Flexible budget management and "cash-flow" plan in national and international hotel units. Journal of Econophysics & New Economy, 199.

Radu, M., & Giju, G. C. (2015). The Flexible Budget–Basic Tool Of The Management Control In The Economic Entities. Scientific Bulletin-Economic Sciences, 14(1), 3-10.