Located in New York City, Babycakes is a popular health-conscious vegan bakery. The bakery’s popularity is attributed to its cupcakes. Due to its success in New York (NY), the management is keen on opening a second store in Los Angeles (LA). Such a move requires thorough planning particularly regarding which component to invest in as well as how much to spend. A budget will be vital in guiding this process. While the master budget is detailed and comprises of numerous elements, this paper will place emphasis on the sales budget.
The Need for a Budget
A budget is a written statement of a particular company’s plans for a certain period that is expressed in financial terms. The importance of budgeting cannot be overstated . This is irrespective of the size or nature of the enterprise in question. A budget helps in fostering efficiency, judging performance and ensuring that responsible spending is promoted . Also, it aids in evaluating future performance, motivating employees and reducing wastage (Hofstede, 2012; Libby & Lindsay, 2010; Williams & Williams, 2010). A budget may act as an early warning system for Babycakes which would aid in signaling when the business is doing badly. Likewise, it may also be used to achieve cash flow control and cut cost. Lastly, a clear budget would enable Babycakes to plan , prioritize fiscal spending and make the necessary adjustments so as to increase the income generated (Libby & Lindsay, 2010).
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In the absence of a budget, it would be highly likely for Babycakes to overspend and fail to prioritize its spending. It would be difficult for the management to be efficient, judge its performance, motivate its employees and evaluate its future performance. Also, it would be easy for the bakery to over-bake in which case a considerable amount of waste would be generated . Moreover, without a proper budget, it would be highly likely to end up with a shortage of supplies for the intended production. Subsequently, this would result in reduced sales and a corresponding decline in revenue generated. Overall, this would have an impact on the growth of the business including the ability to expand its operations.
Sales Budget for the Los Angeles Store
In developing the sales budget for the fourth quarter of 2016, one-half of Babycake’s Valentine’s Day sales are used as the basis for the regular daily sales of its LA store. This translates to 2,250 units. Given that each of the three months has 30 days, this translates to a monthly sale of 65,500 units. However, monthly variations are highly likely to be experienced. This is particularly due to the three major holidays namely Halloween, Thanksgiving, and Christmas. In the three months, it is estimated that 450, 350 and 500 additional units will be consumed respectively. The slight increase in the number of units consumed during the Halloween and Christmas holidays compared to Thanksgiving are attributed to the fact that eating of cakes is an integral part of the celebrations. Also, a price change is put into consideration in the month of December compared to October and November. This is informed by the increased demand for cakes in December which implies that more resources will be directed in their production so as to meet the demand . The monthly sales are therefore estimated at $237,825, $237,475 and 272,000 for the months of October, November, and December respectively
There is also need to launch new products to cater for the three holidays. In this case, these include soul cakes, fruit cakes, and Yule log cakes. The three are unique components of Halloween, Thanksgiving, and Christmas hence their production. It is estimated that approximately 400, 250 and 450 units of the new products will be sold in the three holidays respectively. The assumption is that there is an elaborate cake eating culture during Halloween and Christmas as opposed to Thanksgiving hence the variation in the estimated unit sales. Likewise, due to the magnitude of Christmas celebrations, more cakes will be consumed then. Moreover, the increased unit price of the new products is attributed to the increased resources, including time, finances and expertise that are needed in launching the new products. The slight variation in the unit price for Yule log cake is attributed to the hectic nature of the Christmas holiday which justifies the need for slightly more resources in the production, marketing and sales of the new product. The new products account for $1600, $1000 and $2025 more sales respectively. Overall, the sales for the three months of the fourth quarter will be $239,425, 238,475 and 274, 025 respectively. This translated to a total quarterly sale of $751, 925.
Flexible budget versus static budget
A flexible budget is adjustable with changes in the assumptions that informed the development of the budget by the management in the planning process. However, a static budget does not change even when significant changes from the assumptions made during budgeting are noted. A flexible budget is, therefore, more adaptable (Libby & Lindsay, 2010). This means that it can absorb changes hence placing Babycakes in a position to manage negative changes in the marketplace. For instance, due to the static nature of Babycake’s budget, with sales increases, the budget shows an unfavorable variance. A flexible budget will address this problem by providing the owner with a dynamic guidance on the amount of money to be spent as the business reality changes. Likewise, the budget will account for variable and fixed expenses in a comprehensive and responsive way compared to the way the static budget would. For instance, a flexible budget would split costs into fixed and variable. Examples of the two include rent and marketing costs respectively. Secondly, the owner would decide that the marketing cost would comprise 10% of the revenue. This would translate to $75, 192.5. However, if the revenue fell lower than the anticipated $751,925, she can decide to lower the marketing budget to $60,000.
Increased expenditure compared to budgeted amount
Numerous circumstances could occasion the spending of more money compared to the budgeted amount. This overspending could be occasioned by under-budgeting, lack of adherence to the budget and the use of a static budget. The first approach to addressing this challenge is ensuring that a proper and comprehensive budget is prepared . In case the owner lacks adequate knowledge of budget preparation, she hiring an expert would be appropriate. Likewise, there would be a need to embrace a flexible budget so as to take care of changes that may occur in the marketplace. Further, it would be advisable for the owner to ensure that she sticks to her budget once developed, in which case lessons in financial management would be useful. Moreover, the owner has to focus on cutting her expenditure. There is also a need for periodic review of the budget to ensure that it’s realistic and make changes if need be.
References
Hofstede, G. H. (Ed.). (2012). The game of budget control . Routledge.
Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research , 21 (1), 56-75.
Williams, S., & Williams, N. (2003). The business value of business intelligence. Business Intelligence Journal , 8 , 30-39.
Appendix I: Sales Budget for the 4 th Quarter of 2016
Babycakes, LA Store
Sales Budget
For the 4 th Quarter of 2016
| October | November | December | Total | |
| Sales Units | 67,950 | 67,850 | 68,000 | 203,800 |
| Price per Unit ($) | 3.50 | 3.50 | 4.00 | |
| Total sales ($) | 237,825 | 237,475 | 272,000 | 747,300 |
Calculations:
Usual day sales for the quarter = One-half of the Valentines Day’s sales
= 1 1 /2 X 1500
= 2250 units per day
Units sold in a month = 2250 X 30
= 67,500 units
Monthly variations:
October = 450 units due to Halloween
November = 350 units due to Thanksgiving
December = 500 units due to Christmas celebrations
Appendix II: Sales Budget for new products in the 4 th Quarter of 2016
Babycakes, LA Store
Sales Budget for New Products
For the 4 th Quarter of 2016
| Halloween (October) | Thanksgiving (November) | Christmas (December) | Total | |
| Product | Soul Cakes | Fruit Cakes | Yule Log Cakes | |
| Sales Units | 400 | 250 | 450 | 1100 |
| Price per Unit ($) | 4.00 | 4.00 | 4.50 | |
| Total sales ($) | 1600 | 1000 | 2025 | 4625 |
Appendix III: Overall Sales Budget for the 4 th Quarter of 2016
Babycakes, LA Store
Overall Sales Budget
For the 4 th Quarter of 2016
| October | November | December | Total | |
| Sales Units | 67,950 | 67,850 | 68,000 | 203,800 |
| Price per Unit ($) | 3.50 | 3.50 | 4.00 | |
| Total sales ($) | 237,825 | 237,475 | 272,000 | 747,300 |
| Sale of new products | 1600 | 1000 | 2025 | 4625 |
| TOTAL ($) | 239,425 | 238, 475 | 274, 025 | 751,925 |
