Budget Planning and Control

Realistic Budget vs. No Budget

Babycakes bakery is a specialized bakery dedicated to creating quality, gluten-free, and vegan cake. The company is located in New York and is owned by Erin McKenna. Erin expanded her to open another bakery in Los Angeles. Because of this expansion, Erin has to create a realistic budget for the LA store. A realistic budget is needed to develop a plan for how to spend on equipment or machinery such as utensils, pans, and mixers, and bakery supplies like flour, oil, sugar, and decorations. Having a realistic budget is very significant because it will ensure that Erin has enough money for the things that are important to the firm. She will also be able to keep the company out of debts because she will be able to pay off her debts from the money she earned from the sales. 

The first step Erin has to monitor or track her the cash outflows of the firm using any tool such as Microsoft Excel to keep records. Once she knows her expenditures, she would be able to make decisions on how to allocate her profits (Edmunds, 2018). Secondly, Erin has to ensure that her products are of good quality. She can achieve this by providing the quantity baked meets the demand and that she does not cook too much. If the bakes too much, the items would become stale and would have to be thrown away. As a result, the company may incur losses. 

Moreover, the firm has to meet the demand of the customers. If the company fails to bake enough, it risks losing customers making the profits margin of the firm reduce. Thus, to ensure the firm generates significant profits, Eric has to ensure that her company bakes enough cakes to meet the demand of her customers. Lastly, having no budget can make Babycakes go under the cost or even over the cost of the goods that sold. If Eric wants to make her firm succeed, she has to satisfy the preferences and demands of her customers. To achieve this, she has to create a budget. Through this, she will be able to utilize all her goods and services. 

Sales Budget/New Products 4th Quarter 

For the three upcoming holidays, Halloween, Thanksgiving, and Christmas, Erin ought to add three new products. Erin has added a delicious orange candy cone cupcake during the Halloween holiday in October. She also has to create a scrumptious during the Thanksgiving in November. Lastly, in December, where there is Christmas which is one of the most celebrated days, Babycakes have to create a magnificent candy cane cupcake. The sales budget project for the three months, October, November, and December, are shown in Appendix A. The unit sales of the firm are 23,100, 223,000 and 23,300 for October, November, and December respectively. There is an increase in unit sales during the last 4th quarter. The assumptions made are that the firm sale 750 units per day the price per unit is $3.5. The anticipated sales during the holidays are 600 units, 500 units, and 800 for Halloween, Thanksgiving, and Christmas respectively. The expected price per unit for the holiday’s sales was assumed to be $1.40. The budget sales for the LA store are shown in Appendix B. It includes half of Valentine day sales. The gross profits of the firm increase over the last quarter. 

Static vs. Flex

“In constructing a sound plan and budget institution must shift from static or infrequent planning and budgeting process to continuous, flexible process to be able to produce a reliable budget” (Morini, 2002). Budgeting is very significant when starting any business. It is challenging to come with the budget of the new store since there are no previous periods to guide the firm in creating its budgeting. It is very tedious to create the budget for the three seasons. For Babycakes, Erin has decided to use a static budget. This is an option great because it will help the firm prepare the budget for the following year as it will show the numerous different variances by line items. 

The disadvantage with the type of budget is that it requires to make predictions based on the previous season records. However, in this case, Babycakes does not have any record from the last period. Since the LA store is new, the numbers from the business across the country ought to be used. However, the figures do not take into account the taste, culture, the way people celebrate, and the economic climate of LA. Thus, it very difficult to create a budget using figures from another area. This is the reason as to why the firm is still experiencing unfavorable variances its sales increases. When the static budget is used, the production cost becomes variable, and sales of the firm outperform the budgeted amount. 

Taking a look at Appendix 2, the sales drives the cost of production units. I assumed that the sales for October failed to reach the budget. As a result, the sales variables are unfavorable. However, because of the lower demand in October, we didn’t produce a lot making the production cost favorable. There was a favorable increase in sales in November and December. However, the production started to flip unfavorably. The disadvantage with the static budget is that changes can’t be made to adjust to the changes in the market. This is a significant concern since the LA store is new and there are no records from periods to base judgments on. 

Therefore, the flex budget is the best option for the LA store. Through this, the firm can make changes or adjustments to ensure the firm adjusts to the market condition or variances (Churchill, 1984). Through this, the budget for the first year can be flexed and actuals from this year are used for the year that follows. Flex budget provided better opportunities to analyze the variances. 

Financial Challenge

One of the financial challenges is overspending on the inputs and services. Overspending can stem from the cost of goods and services. This is part of the cash outflows of the firm and sometimes incorporate operating expense. If the cash outflows are higher than the cash inflows, the firm is making losses and adjustments have to be made to ensure the firm make profits. Overspending is caused by not having a budget and no plans (Fernandez, 2018). It can also be resulted from buying wrong products or services, buying excess products, working with wrong vendors, and others.

Additionally, If a product becomes stale, it ends up being thrown away which results in using too many products. Thus, plans have to be created to avoid overspending. A plan on how each of the items ought to be used should be created and budgeted for. This would facilitate the correct ordering of goods and services. For instance, the owner of Babycakes knows that her cornbread does not sell well. Thus, to save in buying products or ingredients for making this product, she has to cut back the amount that she bakes. 

Thus, to reduce overspending, Erin has to account of the actual costs of goods and services in her statements. She also has to plan for the amount she wants to produce and ensure it meets the demand for the day and does not exceed it. The firm has to ensure that it uses the correct amount of measurements and ingredients when mixing the goods or preparing them. By managing the products used effectively, it will reduce the overspending of the firm. 

References

Churchill, N. (1984). Budget Choice: Planning Versus Control: [Online]. Available at: https://hbr.org/1984/07/budget-choice-planning-versus-control . Accessed 29th Nov 2018. 

Edmunds, S. (2018). The Advantages of Budgeting in a Business. [Online]. Available at: https://smallbusiness.chron.com/advantages-budgeting-business-21740.html . Accessed 29th Nov 2018. 

Fernandez, S. (2018). 7 Reasons We Overspend (And How to Overcome them). [Online]. Available at: https://www.hermoney.com/save/budgeting/why-do-people-overspend/ . Accessed 29th Nov 2018. 

Morini, M. (2002). Four Steps to Effective Planning and Budgeting. Bank Accounting & Finance (08943958), 15(6), 47. 

Appendices

Appendix 1

Appendix 2