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HR7003 INDIVIDUAL COURSEWORK BRIEF

Executive summary

The report is made focusing on a brief analysis of the budgets of London Docks Cafe. The financial analysis is done to understand the cafe performance for September production. The revenue and spending variance report show the operating expenses and net profit of the company. A brief discussion of the benefits of a robust budgetary process has been discussed. The financial analysis raised some concerns for the management of London Docks Cafe. Hence the areas have been discussed along with some helpful recommendations. A profitability and sustainability ratio analysis have been developed to understand the company growth rate. Finally, a detailed conclusion has been drawn to understand the overall report.

Introduction

Financial analysis is a vital process to understand the financial position of the business for a certain period in a business. This analysis includes the analysis of the company budget, financial reports of the year, business transactions, cost of operations, and plan for the projects. Usually, it is considered to be the procedure to analyze the company’s solvency of profitability, sustainability, and liquidity. In this study, financial analysis has been conducted on the budget comparison for London Docks Cafe. The cafe is situated right near the airport and sells quality meals to the passengers and non-passengers near the radius. This study aims to discuss the benefits of the budgetary process and the concerning areas for the management of the London Docks Cafe.

Objectives of the budgetary process of London Docks Cafe

Budgeting is the planning that simply states the financial terms and the business operations. It helps a business entity to create a goal and process the business operations according to the aim to be successful. The robust budgeting process is considered to be extremely important to plan the financial acquisition of a company. As per the view of Ahrens and Ferry (2018), the comparison between the actual and the planning budget of London Docks Cafe has been done to understand the flow of their financial operations. As the company followed a robust budgetary process, some of the objectives of budgeting are discussed below:

Forecast and plan

One of the vital objectives of budgeting is to predict and plan the business cash flow properly. Budgeting for London Docks Cafe has been made to understand the operational expenses of the firm for the fiscal month of September, 30. It is important for starting a project the planning of the project is done and predicting the correct cash value of a project is not possible (Ayorekire, 2018). Therefore, a robust budgeting process is applied to understand the areas for expenses that can help to obtain a close estimation of the financial planning of a project. According to the planning budget of London Docks Cafe, their revenue plan was £100000 while in actuality they could generate £90000.

Sales or Production coordination

The setting of coordination between production management and sales is another main objective of robust budgeting. Forecasting the finishing period of production affects the time of sales as well as marketing in a greater manner. Hence, it is important to create a coordination point between these two to ensure efficiency in the business. As mentioned by Eyibio and Daniel (2020), in the planning budget the product team estimated production of 20000 units for September. However, due to lack of coordination, the cafe could produce only 18,000 units of meals that have to affect their net profit at the end of the month.

 

Figure 1: Objectives of budgeting

(Source: Developed by the researcher)

Motivate employees

In a business, if the employees are not motivated enough it can affect the operations of the business. Employees often lose track without a transparent goal of the given job and hence it jeopardized the operations of the firm. The benefits of a robust budgetary system are to provide a clear operational goal for the business that helps the employee to deliver their assigned job within a certain period. Thus it maintains the fluency of work in the firm and the business reaps benefits from enthusiastic employee performance (Graur et al. 2017). The budgets of the London Docks cafe shows there has been a drop in their production and demotivated employees can be a factor affecting the drop.

Performance evaluation and control

A robust budgeting system is utilized to assess and control the performance and structure of a business. Income and expenditure management plays a vital role in forecasting the revenue and profit of the firm. Hence, it is important to keep a close check on the company’s performance and make plans to upgrade it in a better way. As per the view of Grima and Caruana (2017), the budgets of London Docks Cafe have shown how their operational expenses have exceeded their planned budget. The rent for facilities, insurances, and fuel has exceeded £1200 approximately.

Authorization of activities

Correct authorization of activities and resources is extremely important to increase the profitability and productivity of the business operations. According to a robust budgetary process followed by London, Docks Cafe states that sufficient resources and proper allocation of activities in a firm ensures business growth. At the time when a budget is properly estimated then only a business acquires great profit from the operations of the firm. As mentioned by Hang et al. (2019), due to insufficient authorization of activities and resources allocation net profit of London Docks Cafe dropped from £25700 to £20100.

Revenue and operational variance report of London Docks Cafe

The revenue and spending variance report developed in this study is based on the comparison between the estimated and actual budget of London Docks Cafe. The variance report here shows the percentages of the difference between each operation of the planned and actual budget of the cafe.

Particulars Planning QTY Planning(£) Actual Qty Actual(£) Variance
Budgeted meals quantity 20000 18000 90
Revenues 5 100000 5 90000 90
Operating expenses
Raw Materials 2.5 50000 2.5 45000 90
Wages and salaries 10500 10000 95.24
Utilities 3500 3400 97.14
Facility Rent 5000 5500 110
Insurance 2800 3200 114.29
Fuel 2500 2800 112
Total Operating Expenses 74300 69900 94.08
Net Operating Income(Revenue-Expenses) 25700 20100 78.21

Table 1: Net operating income of London Docks Cafe

(Source: Developed by the researcher)

The above-mentioned table shows the revenue and spending variance report that mentioned the operational expenses and net profit of the firm. As per the view of Heath and Goksu (2017), London Docks Cafe originally planned to make a production of 20,000 units of meals. However, due to a rise in their operational expenses, they could only manage to produce 18,000 units in the month of September. The company estimated its revenue for the month to be £1, 00,000 while in actuality they could obtain only £90,000. The slow rate of productivity in the firm has affected its net profit too by a margin of 78.21%.

As per their estimated budget, the net profit must have been £25700 however in reality they could only gain a net profit of £20100. The areas that have crossed their estimated budget are mostly their operational expenses and it contributed to the rise of operational expenses. Facility rent, insurance, and fuel charges mostly went over the budget that has shrunk their profit margin (Koval et al. 2020). To do better London docks cafe management needs to intensify their sale and keep the cost low to gain more profit.

Concerning areas for the management of London Docks Cafe

From the above-mentioned analysis of the revenue and spending variance report, there have been some concerning areas identified. The cafe management needs to take adequate steps for the improvement of the business in the firm. The concerning areas for the management have been discussed below along with some recommendations for improvement:

Insufficient or unskilled talent

While recruiting employees for a company it is extremely important to hire skilled and highly motivated employees. Due to the lack of skills in company employees both the operations and profitability of the company can be affected (Nwankpa and Okeke, 2017). London Docks Cafe management needs to ensure the recruitment of only skilled and sufficient employees for the firm of the operation.

Execution errors

Even though a company has enough resources or skilled employees it can fail to achieve the targeted profit margin due to execution errors. London Docks Cafe has estimated its fuel, insurance, and rent charges to be profitable for the company. However, due to some errors in the execution, the cafe could not face the desired profit (Shahbaz et al. 2017). Therefore, in order to make the business of London Docks Cafe more profitable, they need to ensure there is no place for execution error in the firm operation.

Insufficient knowledge of workers

Freshly recruited employees tend to make more mistakes than the existing employees in a business. It happens due to less knowledge in the employee about the company terms and policies or the business goals. The workers of London Docks Cafe have not been educated properly regarding their company goals and hence they lacked in their performance (Shuaib et al. 2020). The suggestion to the management of London Docks Cafe is to properly educate their employees regarding the company goals and also after a fresh installation.

Figure 2: Areas of concern for management

(Source: Developed by the researcher)

Increased expenses

Increment in expenses in a firm operation is extremely crucial as it affects the operational cost directly. The direct cost is considered tangible and held accountable directly with the operational expenses hence it cannot be removed or decreased. On the other hand, indirect costs are intangible costs that can be easily decreased as it does not hold accountable directly. As per the view of Wichayaapa (2019), London Docks Cafe can easily reduce their indirect cost as they have crossed the estimated budget and hence it affected their profit.

Profitability and sustainability analysis of London Docks Cafe

Profitability

Profitability analysis is done to understand the ability of profit generation of the output in a business. Profitability is considered as one of the four stages of financial analysis on which the performance of the company depends. As per the view of Felbermayr et al. (2019), the profitability analysis is done on the basis of a comparison between the actual and planned budget of London Docks Cafe. The profitability ratio has been developed and compared with the planned budget (Olawumi and Chan, 2018).

Operating profit ratio of planned budget Amount
Planned Profit ratio 25.7
Operating profit 25700
Revenue 100000

Table 2: Profitability ratio based on planned budget

(Source: Developed by the researcher)

The above-mentioned table shows the profitability of 25.7% of London Docks Cafe based on the revenue of £10000.

Operating Profit ratio of the actual budget Amount
Actual profit ratio 22.33
Operating profit 20100
Revenue 90000

Table 2: Profitability ratio based on the actual budget

(Source: Developed by the researcher)

On the other hand, the table above shows that the actual profitability ratio of London Docks Cafe was 22.33 % based on the actual revenue of £90000.

Figure 3: Profitability analysis

(Source: Developed by the researcher)

  • Calculations of gross profit margin estimate and cover the cost of office, shareholder dividend, and administration cost. Hence estimation of gross profit margin is important in profitability calculations.
  • Calculations of net profit margin in profitability ratio analysis are important as changes in other ratios directly affect the net profit.
  • As mentioned by Liu (2018), return n equity (ROI) is dependent on the net profit margin in profitability. The shareholders tend to gain higher dividends if the return on equity is higher.
  • The asset management of the company is highly influenced by the Returns on capital employed (ROCE) in profitability calculation.
  • In profitability analysis Return on assets (ROA) helps a business to understand the income scope of the company.

Sustainability

Sustainability on the other hand helps a company to analyze its financial strength and growth rate. As per the opinion of Olawumi and Chan (2018), the sustainability analysis in this study is done to understand the profitability and growth direction of London Docks Cafe.

Figure 4: Sustainability benefits

(Source: Developed by the researcher)

  • The company reputation and growth of a company is often decided by a good sustainability rate. Sustainability often includes the financial and economic factors of a company.
  • In company sustainability analysis supports their aim towards their new projects and innovations.
  • An efficient level of sustainability helps a company to make wise decisions regarding the company investment (Zouaghi et al.2016).
  • Sustainability in a business helps to decode the risk nature of investment and lending decisions.

Conclusion

It can be concluded from the study that the cost assumption in the estimated budget of London Docks Cafe was higher than the actual one. The cafe needs to prepare a structured budget to avoid the shortage in its net profit.  London Docks Cafe needs to intensify its production and sales in order to gain more profit. In this study, a revenue and spending variance report have been made to give the company a clear idea of where they crossed the budget. Some helpful recommendations also have been discussed to increase productivity and eliminate extra costs. A profitability and sustainability ratio analysis have been created to compare both budgets. Finally, a brief conclusion has been drawn on the study of London Docks Cafe to understand the position of the company.

Reference 

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Ayorekire, M., 2018. Budgeting and Budgetary Control in Non-Governmental Organisations: A Case of Infectious Diseases Research Collaboration (IDRC).

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Nwankpa, L.O. and Okeke, R.C., 2017. Budgeting for Change in The Nigerian Public Sector: A Qualitative Research. African Research Review11(4), pp.7-16.

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Shahbaz, M., Van Hoang, T.H., Mahalik, M.K. and Roubaud, D., 2017. Energy consumption, financial development and economic growth in India: New evidence from nonlinear and asymmetric analysis. Energy Economics63, pp.199-212.

Shuaib, M.F. and Olanrewaju, A.O., 2020. Budgeting/budgetary control system and institutional effectiveness in universities in Kwara state, Nigeria. Journal of Educational Research in Developing Areas1(2), pp.100-111.

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Zouaghi, F., Hirsch, S. and Garcia, M.S., 2016. What drives firm profitability? A multilevel approach to the Spanish agri-food sector (No. 873-2016-60917).

 

 

 

 

 

 

 

 

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