Quantitative Financial Plan: Budgets

Quantitative Financial Plan
Quantitative Financial Plan

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Quantitative Financial Plan

Introduction

A budget is a quantitative financial plan for a specified period of time. The financial plan includes sales volumes, expenses, resource quantities, liabilities, assets and cash flows. The budget provides the details for strategic management (O’Hoyt, 2014). Budgets assist in financial planning of the actual business or production of certain products (Williams, Haka, Bettner & Carcello, 2008) Budgets also coordinate different organizational activities and also control resources, provide transparency and accountability (Bragg, 2010).

Budgets, financial plan are also used to forecast the requirement of future financial needs of the company. The financial performance of a company can also be analyzed by comparing the actual budget from the standard budgeted. The variance analysis provides the management with enough information to reorganize its operations and also to investigate any losses that may not have been anticipated (Bragg, 2010).

  1. Cash budget on a monthly basis for six months ending June 30th 2016
Sharp 6 Months Cash Budget Ending June 2016
DetailsJanFebMarAprMayJune
Sales247500262500277500277500360000360000
Wages ( 6 employees)783078307830783078307830
Jones Salary (Director)560056005600560056005600
Purchases256500222300199500222300256500273600
Other Expenses106053005300530053004240
Loan Repayments325032503250784478447844
Total Expenses274240244280221480248874283074299114
Net Income-267401822056020286267692660886
Balance B/fwd7844-18896-6765534483970160896
balance C/Fwd-18896-6765534483970160896221782

The net income is a loss of 26,740 in January 2016 while the balance brought forward for the same period reduces the amount carried forward to a loss of 18896. The highest sales are expected in the months of May and June. The total purchases as a percentage of sales adds up to 80.2% of the total sales. The director’s salary is 2% of the total sales. Loan repayments total to 1.86% of the total sales.

The total expenses are estimated to 88% of the total sales (Garrison, Noreen & Brewer, 2009). That means that the Net income expected is just about 12%. The financial performance trends for the budget are shown on the table below. In February 2016 the total sales would grow by 6.06% whereas in March the same year the total sales would grow by 5.71%. There sales growth would be zero in the months of April and June.

But in May 2016 the sales would grow by 29.73%. The expected cost of purchases is also expected to in February and March by 13.33 and 10.26%. For the remaining months the cost of purchases would increase by 11.43%, 15.38% and 6.67% for the months of April, May and June (Aranya, 1990).

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Sharp 6 Months Cash Budget Ending June 2016 Trend Analysis (%)
DetailsJanFebMarAprMayJune
Sales 6.065.710.0029.730.00
Wages ( 6 employees) 0.000.000.000.000.00
Jones Salary (Director) 0.000.000.000.000.00
Purchases -13.33-10.2611.4315.386.67
Other Expenses 400.000.000.000.00-20.00
Loan Repayments 0.000.00141.350.000.00
Total Expenses -10.92-9.3312.3713.745.67
Net Balance -168.14207.46-48.90168.73-20.85
Balance B/fwd -340.90-96.42-8286.9851.7291.61
balance C/Fwd -96.42-8286.9851.7291.6137.84
  • Cash budget for six months ending June 30th 2016 with 15% sales reduction in final three months

When the total budget is adjusted downwards by 15% of the total sales for the last three months as forecasted below;

The sales would decrease from 277500 to 235875 in April while in May and June the sales would decrease from 360,000 for both May and June to 306000 for both months. These reductions would result in reduction of net income with approximately the same percentage.

The total net income for April would be a loss of 12,999 from the initial amount of 28626 before the 15% reduction. In May and June it would amount to 76926 and 60886 compared to the net amount after the 15% reduction which amounted to 22926 and 6886 (Garrison, Noreen & Brewer, 2009).

Sharp 6 Months Cash Budget Ending June 2016
DetailsJanFebMarAprMayJune
Sales247500262500277500235875306000306000
Wages ( 6 employees)783078307830783078307830
Jones Salary (Director)560056005600560056005600
Purchases256500222300199500222300256500273600
Other Expenses106053005300530053004240
Loan Repayments325032503250784478447844
Total Expenses274240244280221480248874283074299114
Net Balance-267401822056020-12999229266886
Balance B/fwd7844-18896-676553444234565271
balance C/Fwd-18896-67655344423456527172157

When the sales are reduced by 15%, the total sales in May and June would decrease from 360,000 to 306,000 for both months (Hermanson, Edwards, & Invacevich, 2011). The most notable trend is that the total amounts that would be carried forward would register a higher margin of growth when the sales are decreased by 15% (Anderson and Sedatole, 2013).

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Sales Reduced By 15%   
Sharp 6 Months Cash Budget Ending June 2016 Trend Analysis 
DetailsJanFebMarAprMayJune 
Sales6.065.71-15.0029.730.00 
Wages ( 6 employees)0.000.000.000.000.00 
Jones Salary (Director)0.000.000.000.000.00 
Purchases-13.33-10.2611.4315.386.67 
Other Expenses400.000.000.000.00-20.00 
Loan Repayments0.000.00141.350.000.00 
Total Expenses-10.92-9.3312.3713.745.67 
Net Income-168.14207.46-123.20-276.37-69.96 
Balance B/fwd-340.90-96.42-8286.98-23.4954.14 
balance C/Fwd-96.42-8286.98-23.4954.1410.55 

The recommendation to the management is that the forecasted budget presents a profitable future for the company and should be implemented as all the purchases and all other expenses would have been paid off by the second month even when the sales are reduced by 15%. However, the cost of sales is very high and should be reduced (White, Sondhi and Fried, 1997). The net income margin of 12% is too small.

When the sales are reduced by 15%, the purchases would increase by 11.43% in April while in May and June purchases would also decrease by 15.38% and 6.67% respectively. Total expenses however would increase by 12.37% in April and 13.74% in May while in June total expenses amounted to 5.67%.

The net income would reduce by 12.2 percent in April while in May and June the Net income would reduce by 278.37% and 69.96% compared to the increase in initial Net Income of 168.73% and a reduction of 20.85% in May and June respectively. The increment of 10.55% after a reduction of 15% compares relatively to the initial increment of 37.84% on the total balance carried forward (White, Sondhi and Fried, 1997).

Sharp 6 Months Cash Budget Ending June 2016
DetailsJanFebMarAprMayJuneTotals% of Sales
Sales2475002625002775002775003600003600001785000 
Wages ( 6 employees)783078307830783078307830469802.63193277
Jones Salary (Director)560056005600560056005600336001.88235294
Purchases256500222300199500222300256500273600143070080.1512605
Other Expenses106053005300530053004240265001.48459384
Loan Repayments325032503250784478447844332821.86453782
Total Expenses274240244280221480248874283074299114157106288.0146779
Net Balance-26740182205602028626769266088621393812 
Balance B/fwd7844-18896-6765534483970160896288482 
balance C/Fwd-18896-6765534483970160896221782502420 

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  • Conclusions and recommendations

To conclude, the growth in total sales would continue to increase throughout the rest of the year as predicted by the trend hence the future of the business is very bright. The company should continue and implement the budget as planned. The total sales amounted to 2.6% of the budgeted sales while purchases were the highest expenses and it amounted to 80.2% of the total sales.

Loan repayments amounted to 1.9% of the sales. The company would remain profitable as long its operational costs don’t exceed the 80.2% range. The reduction in sales by 15% would result in a reduction of 69.96% in net income (Allaboutbudgets, 2015).

References

Anderson, SW & Sedatole, KL 2013. ‘Evidence on the cost hierarchy: The association between resource consumption and production activities’. Journal of Management Accounting Research (25): 119-141.

Aranya, N 1990. ‘Budget instrumentality, participation and organizational effectiveness’, Journal of Management Accounting Research (2): 67-77.

Allaboutbudgets (2015) Forecasting Revenues retrieved April 2016 from http://allaboutbudgets.com/2015/12/09/forecasting-revenues/

Bragg, S 2010. What Are The Advantages Of Budgeting, Accounting tool. Retrieved from <http://www.accountingtools.com/questions-and-answers/what-are-the-advantages-of-budgeting.html > (3 March 2016).

Garrison, R, Noreen, W & Brewer, P 2009. Managerial Accounting. McGraw-Hill Irwin New York.

Hermanson, RH, Edwards, JD  & Invacevich, SD  2011. Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73. McGraw Hill. Boston.

O’Hoyt, B 2014. The Disadvantages Of Budgeting, Retrieved from http://www.cpapracticeadvisor.com/blog/10951056/the-disadvantages-of-budgeting. (2 March 2016).

White, G, Sondhi, A. & Fried, D 1997. The Analysis and Use of financial statements, Wiley Press. New York. Williams, JR, Haka, SF, Bettner, MS. & Carcello, JV 2008. Financial & Managerial Accounting, McGraw-Hill Irwin. Boston

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