HR7003 Finance Assignment Sample
London Docks Cafe
Part A
Budget is the forecast of financial statements, cash budget, production budget, sales budget. The budget helps to channelize and structure the decision-making process and also helps to pass the responsibility, and the employees are better aware of their targets (Ganti, 2021). The budget is prepared so that the company can make decisions accordingly. The budget helps the business to plan properly and also to make provision for the contingency. The company first prepares the sales budget, and after that production, the budget is prepared to gauge the raw material requirements. After all, this cash budget is prepared. A cash budget is essential as the company needs to check that they have adequate funds with them in the year, and also, they can plan for raising funds if there is any shortage. The company needs to maintain for there working capital needs to plan better. The cash inflows and outflows need to be correctly analyzed. The company will also perform the variance analysis to check the variance and compare the actual with the budgeted. This will help to make a more reliable estimate in the future (Ganti, 2021).
E.g., simply stating “we need to keep labor costs as low as possible” is not a quantified plan. Conversely, stating “Budgeted labor costs for this quarter should be £150,000” is a quantified plan of action.
The benefits of engaging in a robust budgetary process are as follows:
- Budgeting helps to provides continuous improvement and also helps to anticipate problems. Budgeting helps to provide control as the management can track the variance and try to improve the performance (Jeferson, 2015).
- Budgeting provides greater confidence in decision making. Also, it helps to track the performance of employees (Jeferson, 2015).
- Budget helps to effectively allocate cash. The cash needs to effectively utilized between working capital and capital expenditure.
- Budget are forward looking plan and the efficiency of the budget depends on forecast of the person.
- Suitable for organisations that operate in a stable environment where historic figures are reliable and are not expected to change significantly (Jeferson, 2015).
- Budgeting improves communication: it is important in an organization to keep all the individuals informed about the policies, objectives, performance, and program.
Part B
| London Docks Café | |||||
| Profitability Variance Statement | |||||
| Particulars | Planning | Actual | Variance | Favorable/Unfavourable | |
| A | B | C = A – B | |||
| Budgeted meals quantity | £20,000 | £18,000 | £2,000 | U | |
| Revenue | £100,000 | £90,000 | £10,000 | U | |
| Expenses: | |||||
| Raw Material | £50,000 | £45,000 | £5,000 | F | |
| Wages & Salaries | £10,500 | £10,000 | £500 | F | |
| Utilities | £3,500 | £3,400 | £100 | F | |
| Facility Rent | £5,000 | £5,500 | – £500 | U | |
| Insurance | £2,800 | £3,200 | – £400 | U | |
| Fuel | £2,500 | £2,800 | – £300 | U | |
| Net Operating Income | £25,700 | £20,100 | £5,600 | U | |
Part C
The actual sales were less than the projected sales, which means adverse variance. To avoid this, the management should estimate demand more accurately after analyzing the business environment and regularly update their forecast condition. All the variable cost variance as favorable as the estimated amount is less than the budget. This has been achieved due to higher efficiency on the part of management. Since variable cost variance was favorable, the contribution variance was favorable as there was less variable cost incurred than estimated.
Direct expenses like raw materials, wages, and utilities has a favorable variance of 5000, 500 and 100 while indirect expenses like rent, insurance and fuel has a unfavorably variance of 500, 400 and 300. Aggregation of all the expenses are favorable while revenue is unfavorable which makes the overall profit unfavorable. Profitability is measured with an income statement. It lists all the expenses and income during a period of time for the whole business. It is very important to measure profitability for the success of the business, whether it is done by recording past profitability or projecting profitability for the future period.
An unfavorable variance occurs as the number of meals quantity sold is 2000 less than the budgeted quantity. This has led to unfavorable variance in revenue by £10,000 and unfavorable operating income to the tune of £5,600. Therefore, the company needs to focus on the no. of meals served, i.e., to have favorable results, the cafe needs to serve meals equivalent to or more than the planned quantity. Also, because of unfavorable quantity sold, there is an unfavorable revenue for the given period, which is not a good sign for the financial position and stability of the company (Wall Street Prep, n.d.). London Docks Café has reported lower actual revenue than the budgeted revenue, which suggests that it will also impact its profitability. Also, this suggests that the management cannot forecast demand for their products correctly and may lead to cash flow problems and can also affect the planned capital expenditure of the company.
The management of the company needs to find ways to increase the profitability of the business. Revenue directly impacts the business, so the management needs to increase the revenue by increasing the volume or increasing the price. The management will take this decision after seeing the price elasticity of the goods. The other method by which the management can increase profitability is by reducing indirect expenditure.
Part D
Gross profit Margin = Net sales – COGS/Net Sales
This helps the company compare its efficiency to create a product or service compared to its competitors. The higher the ratio, the better it is as the company will absorb the shock and keep the price constant during rising raw material prices. This is also dependent on the industry and the product which the business is offering. Companies operating in the premium segment will have a higher GP margin, and businesses operating in a competitive environment offer a lower GP margin (Kenton, 2020). Price consideration can also help to maintain the profitability of the business. If the business is charging less than it should, they can increase the product’s price.
Net profit margin = Net profit/Net Sales
This helps to tell the margin earned by the equity shareholders of the company. This takes into consideration all the expenses of the business, both direct and indirect. The higher this ratio, the better it is for the business (Kenton, 2020).
Operating Margin: This is calculated by dividing operating margin from Net Sales. This gives the operational efficiency of the company, higher the better (Kenton, 2020).
Operating Margin = Operating Profit/Sales*100
Meaning of sustainability:
Sustainability is the capability of the business to maintain its market share for a longer period. However, since the business has an unforeseen situation, it becomes difficult for them to maintain their position and lose out to their competitors.
The company can manage its financial operation and maintain enough liquidity to handle the unforeseen situation regarding finance sustainability. This is done with the help of maintaining higher liquidity and long-term solvency of the company. The company can see its liquidity using the current ratio, quick ratio, and cash ratio. However, for long-term sustainability or solvency, the company will look at debt to equity ratio or other leveraging ratios. The company also needs to earn a healthy profit margin to stay in business and scale up its business.
Sustainability is important for investors, but it is also important for other stakeholders such as government, creditors, customers, vendors, and other stakeholders who directly or indirectly deal with the business. The investor’s main goal is to maximize their wealth, but this wealth maximization is incomplete if it is not sustainable. Therefore, long-term sustainability will help to create long-term wealth generation for the business.
Measures to improve the profitability and sustainability for London Docks Café –
- London Docks Café has reported lower actual revenue than the budgeted revenue, which suggests that it will also impact its profitability. Also, this suggests that the management cannot forecast demand for their products correctly and may lead to cash flow problems and can also affect the planned capital expenditure of the company. Therefore, the company needs to improve its revenue variance by increasing the volume or increasing the price. But the decision needs to be taken after seeing the price elasticity of demand for the product.
- London Dock Business has good management, and the management was efficient enough to curb the direct expenses like wages and salaries, raw materials, and utilities. However, the management was inefficient in controlling the indirect expenditure as the actual expenses were higher than the planned expenditure. For example, insurance, fuel, and rent all have higher expenditures than the budgeted expenditure. So, it becomes important for the company to manage its indirect expenditure well.
- Overall, the company has performed poorly as the actual revenue was lower and the indirect expenses were high. Therefore, the company’s profitability is unfavorable. The management needs to look into the factor and rectify it as profitability is one of the parameters of sustainability in the long run.
References
www.cabotfinancial.co.uk. (n.d.). What are the benefits of budgeting? | Cabot Financial. [online] Available at: https://www.cabotfinancial.co.uk/money-management/money-management/what-are-the-benefits-of-budgeting.
Jeferson (2015). Benefits or Advantages of Budgeting to organization. [online] Money Matters | All Management Articles. Available at: https://accountlearning.com/benefits-or-advantages-of-budgeting-to-organization/.
Ganti, A. (2021). Budget Definition. [online] Investopedia. Available at: https://www.investopedia.com/terms/b/budget.asp.
Wall Street Prep. (n.d.). Budget to Actual Variance Analysis in FP&A. [online] Available at: https://www.wallstreetprep.com/knowledge/budget-actual-variance-analysis-fpa/
Kenton, W. (2020). Profitability Ratios. [online] Investopedia. Available at: https://www.investopedia.com/terms/p/profitabilityratios.asp.
