Budget Planning and Control: Top Tips for Staying on Track

From the babycakes video, budgets can help in the evaluation of future performance, motivating the employees of the company eliminating waste, promoting efficiency and serving as early warning systems. These are just a few benefits that Babycakes could derive from budgeting. Businesses that do not budget are exposed to financial problems as they operate in an ad-hoc way. Budgets can help small and large businesses to develop a roadmap that will help them succeed financially and exploit emerging opportunities, therefore, expanding their operations. Business can use budgets to plan their expenditures and liabilities for example rent, utilities, accounts payable, insurance premiums, payroll, purchasing among others. Having a budget helps businesses like Babycakes to manage their working capital and therefore meet their financial obligations on time, therefore, guaranteeing continuity (Egbunike & Unamma, 2017). Budgeting enables businesses to expand their operations as they are aware of the sources of their finances and the expenditures incurred. A well-prepared budget allows business to set sales target, attract new investors, track their financial condition and enhance their decision-making abilities. 

New Product Development 

Babycakes desires to expand its operation to target new customers with unique products that meet their needs. The cupcakes have been successful in the market and it is envisioned that the three new products will increase its current revenues and use the existing capacity and expertise to produce high-quality products. Babycakes would like to add strawberry shortcake, Boston Cream, and Lemon Ricotta. The sales units are expected to increase slowly in the initial months after the new products are added. Sales are expected to rise as more customers become aware of the new products. The current Babycakes target a unique market segment and therefore customers are aware that the outlet serves that kind of product only. The sales prices should be slightly lower than competitors' prices to attract more customers to the store and to avoid any waste. The total sales are expected to increase following the new addition. 

Assuming that the sales units are one-quarter of the valentine day's sales for the new products, the forecasted unit sales on a normal day will be 0.25*1500 = 375. Similarly, assuming that the price for the new products is set at 90% of the current selling price per unit of the Babycakes, the unit selling price will be $3.325 

Combined Budget for the new Current and New Product 

A flexible budget is one that changes when activity change. As opposed to the static budget that remains the same irrespective of the volume of activity. It calculates the level of expenditure for variable costs based on the changes in the actual revenues. The budget, therefore, varies depending on the level of activity. The revenues for the period are used for calculation purposes once the accounting period is over. The budget generated is specific to the inputs and is used for comparison purposes for control. The fixed costs are first identified. the extent to which the variable costs change with activity is then determined. A budget model is then created. The activity measure is then completed and used to update the variables. The flexible budget is then entered and used for comparison. 

Babycakes should use flexible budgets as they are appropriate in situations where the costs are aligned with activity level. The more cakes she produces, the higher the costs as she will have to source for additional supplies. Similarly, she can clearly identify the fixed costs and the variable costs. The use of flexible budgets can be used to determine the performance of the business as the activity level determines budget amounts. It is, therefore, possible to align the budget with the expectations at any level of activity (Brealey, Myers & Allen, 2013). She can use flexible budgets to plan the activities of the bakery and be able to model the financial results attributable to different activity levels. It is also possible to update the current budget based on the volume of activity 

Flexible budgets, however, have their shortcomings including difficulties in their formulation as some costs have a fixed element in them. Such budgets are useful after the financial statements have been prepared which might pose serious challenges to Babycakes. There are also delays in the preparation of the budget as the entire work must be done once the books of accounts have been closed. It is also not possible to compare revenues and budgeted activities (Brealey, Myers & Allen, 2013). 

Expenditure can exceed the budgeted amount if Babycakes did not follow its budget and bought some of the things which were not in the budget. Impulse buying can be a serious issue to budgeting as the budgeted amount is used to buy items that were not initially considered while preparing the budget. Similarly, the cost price for the supplies might be higher than the budgeted amount leading to the difference. Another reason might be that the budget was not prepared appropriately. It might not have considered other external factors. It is, therefore, necessary to investigate the cause of the variance and take appropriate action to change the situation (Costello, 2011). 

References 

Brealey, R., Myers, S., & Allen, F. (2013).  Principles of corporate finance: Global edition  (11th ed.). McGrawhill. 

Costello, T. (2011). Better Budget Planning.  IT Professional ,  13 (5), 64-63. doi: 10.1109/mitp.2011.78 

Egbunike, P., & Unamma, A. (2017). BUDGETING, BUDGETARY CONTROL AND PERFORMANCE EVALUATION: Evidence from Hospitality Firms in Nigeria.  STUDIES AND SCIENTIFIC RESEARCHES. ECONOMICS EDITION , (26). doi: 10.29358/sceco.v0i26.398