Budget Planning and Control: How to Plan and Control Your Business Budget

Budget versus no Budget 

The realistic budget can play an important role in the management of costs. The owner should prepare a realistic budget for the new business stores that it opens in a new location. The realistic budget is required to help trace the cash flows in the company. It can inform the owner details such as how much money is spent as well as where the money is spent (Weygandt et al., 2015). For example, with a realistic budget, the owner of the business can be able to know the amount of money spent on utensils mixers and pans as well as other cooking supplies that can include oil, mix, flour, sugar, and icing among others. The budget can also play a critical role in helping Erin to pay off debts, build the company track the earned money from different products such as pastries, doughnuts, and cupcakes. 

Sales Budget for the 4th Quarter 

A sales budget contains important information and details concerned with the expected sales and revenues of the company. It is a major component of the master budget that gives the detail of the financial plan of an organization (Cassidy, 2016). In the Babycakes business, the sales budget should incorporate the projection of what the company intends to sales at some point in time in the future. It includes the estimates sales of the company in the future based on the number of units and prices. As the company engages in the production and sale of specialty cakes, it should determine the expected prices and sales unit within a specified period. 

Babycakes 4 th Quarter Sales Projection

The preparation of the sales budget considered some of the basic assumptions. One of the assumptions is that the selling price for the cakes is equal for all the types of the cakes. The selling price per cake is assumed to be $ 23. 

The company intends to introduce three new products to take the advantage of the holidays in the 4th quarter. During those periods the sales of the cakes offered by the company are expected to increase and thus the need for the owner to develop the three new products. The products introduced during the period include the Cream Xmas, Thanksgiving Cakes, and Happy Year Cakes. The Cream Xmas targets the Christmas occasion, Thanksgiving Cakes are designed thanksgiving period while the Happy Yea is designed for the New Year occasion. In order to prepare the budget for the holiday sales, it is important to make some assumption. One of the assumptions is that the holiday sales with last for one day. The unit price is assumed to be $ 25 during the holiday period. It is also assumed that there are 30 days in the respective months. The production cost per unit is taken to be $ 2 for all the specialty cakes manufactured by the company. The estimated budgets showing the sales price per unit, number of units sold and total sales are provided in the table below 

Static versus Flexibe Budget 

In order to have a sound budget, it is important for organizations to construct flexible budget as opposed to the static budget. The flexible budget provides the reliable information regarding the cost and number of units expected to be sold by the company (Sussman & Alter, 2012). Budgeting decisions can prove difficult for the companies especially for those with no prior sales records. As such, the company cannot have any figures to be used as the benchmark when preparing the budget. In case of Babycakes, the owner decided to use a static budget. The static budget can be a viable option since it can help prepare the budget for the following year by providing some information regarding variances. The major challenge faced by the owner of the company when preparing such budget is concerned with determining the figures to use as a benchmark for sales. The company is opening a branch in a new area and thus still lacks important information such as the sales forecast. The only data available for the company is the previous sales of the cakes from other branches. However, using sales records from other branches cannot be reliable is the two regions have different demographic characteristics of the customers. 

From the table above, it is evident that the sales failed to reach its projection in October but started to pick the following months. In November and December, the actual sales exceed the budgeted sales and this resulted in a positive variance. The major problem with the static budget is that it proves difficult to change it even when there are changes in the trend of sales of the products. This can be a major concern for new companies that enter a given market and have no previous records. The problem can be solved when Babycakes use the flexible budget. The flexible budget is the better option that static budget since the organization will not have to worry about the variances. The owner can use flex budget in the first year and use the actuals from the first year to prepare the budget for the second year. This can enable the owner to analyze the variances. 

The Financial Challenge 

Overspending can be a major issue to organizations that can be caused by various factors such as the rise in the cost of goods and service required for production. The amount overspend is typically a component of the income statement and in some cases, it can be classified as operating expenses and thus likely to be overlooked by the business entity. The challenge is primarily concerned with the determination of the category that a particular expense belongs. It caused by not knowing what a person already has, inappropriate plans, and purchasing the wrong products and services. Also, failure to sell products results to wastage of products which can lead to huge losses. Appropriate budget and plans can help the business owner to avoid or reduce chances of overspending (Howard et al., 2016). Erin should have appropriate plans and budget to reduce overspending. For instance, she should identify the goods and services which are required for the production and come up with plans. The cost of goods and services should be determined to enable the preparation of a good budget. 

References 

Cassidy, A. (2016).    A practical guide to information systems strategic planning . CRC press. 

Howard, C., Hardisty, D., Sussman, A., & Knoll, M. (2016). Understanding the Expense Prediction Bias.    ACR North American Advances . 

Sussman, A. B., & Alter, A. L. (2012). The exception is the rule: Underestimating and overspending on exceptional expenses.    Journal of Consumer Research , 39 (4), 800-814. 

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting . John Wiley & Sons.