Cash Budget and Report Analysis
For this piece of assignment, a cash budget will be made for Doomy Corporation for the second quarter of the year. For this budget, all the sales figures for the second quarter and some of the expenditure have been given. Hence, to prepare a cash budget, the sales figure given will be used and some calculations will be worked out in order to fully prepare an outstanding budget for Doomy Corporation the following information will be used efficiently. “Doomy Corporation, a rapidly expanding specialist photocopier manufacturer, is in the process of formulating plans for next year.
The director of marketing has completed his sales budget and is confident that sales estimates will be met or exceeded. The following budgeted sales figures show the growth expected and will provide the planning basis for other corporate departments”. Sales figures of (April ? 2 200 000, May ? 2 500 000 and June ? 2 800 000) The rest of the budget was calculated from the information below: Doomy Corporation has experienced an excellent record in debtors’ (accounts receivable) collection and expects this trend to continue. 60% of billings are collected in the month after the sale and 40% in the second month after the sale.The purchase of raw materials is Doomy’s largest expenditure; the cost of these items equals 50% of sales.
60% of the raw materials are received and paid in the month they are purchased and 40% are paid in the second month of purchase. Hourly wages depend on sales volume and are equal to 20% of the current month’s sales. General and administrative expenses are budgeted to be ? 2 640 000 for the year. Salaries ? 480 000, Promotion ? 660 000, Property taxes ? 240 000, Insurance ? 360 000, Utilities? 300 000 and Depreciation ? 600 000.Corporation tax payments are made by Doomy in the first month of each quarter based on the profit for the prior quarter.
Doomy’s tax rate is 40%. Doomy’s taxable profit for the first quarter is projected to be ? 612 000. Equipment and warehouse facilities are being acquired to support the company’s rapidly growing sales. Purchases of equipment and facilities are budgeted at ? 28 000 for April and ? 324 000 for May. Doomy has a corporate policy of maintaining an end-of-month cash balance of ? 100 000.
Cash is borrowed or invested monthly, as needed, to maintain this balance.Interest expense on borrowed funds is budgeted at ? 8 000 for the second quarter, all of which will be paid during June. 1) Cash budget for Doomy Corporation Below is a cash budget for Doomy Corporation by month and in total for the second quarter starting from April to June only. Income| April| May| June| Total| | | | | | Opening Balance| ? 100,000| ? 2,407,200| ? 4,644,200| ? 7,151,400| Sales| ? 2,200,000| ? 2,500,000| ? 2,800,000| ? 7,500,000| collection of customers (account receivable)| ? 2,040,000| ? 880,000| ? 100,000| ? 3,020,000| | | | | | TOTAL INCOME | ? ,340,000| ? 5,787,200| ? 7,544,200| ? 17,671,400| Expenditure| | | | | General Administration| | | | | Salaries | ? 40,000| ? 40,000| ? 40,000| ? 120,000| Promotion| ? 55,000| ? 55,000| ? 55,000| ? 165,000| Property taxes| | | ? 60,000| ? 60,000| Insurance| ? 30,000| ? 30,000| ? 30,000| ? 90,000| Utilities| ? 25,000| ? 25,000| ? 25,000| ? 75,000| Depreciation| ? 50,000| ? 50,000| ? 50,000| ? 150,000|Equipment and warehouse facilities | ? 28,000| ? 324,000| | | Purchase of raw materials| ? 1,020,000| ? 19,000| ? 114,000| ? 1,253,000| Hourly wages | ? 440,000| ? 500,000| ? 560,000| ? 1,500,000| Tax rate| ? 244,800| | | ? 244,800| | | | | | TOTAL EXPENDITURE| ? 1,932,800| ? 1,143,000| ? 934,000| ? 4,009,800| | | | | | Closing stock| ? 2,407,200| ? 4,644,200| ? 6,610,200| ? 13,661,600| 2. The importance of budgeting for Doomy Corporation Cash budgets is important for Doomy Corporation because provide much more timely information regarding cash inflows and outflows.
Additionally, cash budgets provide much more detailed information for Doomy Corporation. For nstance, cash budgets will typically distinguish between cash collections from credit customers and cash collections from cash customers.Hence, an analysis of the financial statements of Doomy corporation shows that the accounts receivable are constant through out April to may at about ,total of ? 3,020,000; that is, there is seasonal variation in sales. The inventory throughout the second quater each an every item is variable and it totals at about ? 4,009,800 and turns over every 3 months/90 days. Cash sales should amount to about ? 7,500,000 if the inventory of ? ,009,800 valued at cost turns over once in 90 days and if the average mark-up is about ? 2004, 9000. This figure can be roughly checked by referring to the expenses on the income statement.
A rough measure of the cash expenses can usually be obtained by using the operating expenses less any non-cash expenses such as depreciation. Overall this shows that it is very important for Doomy corporations to have cash budget planned for its business, because it can help them assess if they are over spending their money and if the money is going and where it is coming in.Looking at the analysis above, cash budget is important for Doomy Corporation to have, because it ties all of the rest of Doomy’s planning down to numbers and also timing. Also it is the roadmap where they believe they want to go so it helps them set goals in terms of what revenue they want to achieve. And it is also a way to track those goals.
So it provides a great tracking tool and beyond that it puts a discipline on Doomy Corporation to do all the homework necessary to get their business operate effectively and efficiently because in the future they have this opportunity to look forward and ask: What do they need to buy?And What do they need to have in place? Therefore, a cash budget gets Doomy Corporation prepared and helps them see whether or not they are going to make any money. A budget also helps them determine how much money they need to for their operations to continue running. In addition, a cash budget is important for Doomy Corporation because it helps them plan ahead for the next year. Overall, a cash budget allows the business to track how well the business is doing and lets them see where changes need to be made.Most start up businesses do not make money in the first year or certainly not the first six months, but this would vary a whole lot depending on what kind of industry they are in and what kind of business they are in.
3. Benefits and limitations of budgeting This is general theory In the budgeting system so there are a lot of limitations and benefits in this system. The budgeting system businesses have both advantage and disadvantage in budget system and this will be discussed in-depth below: Benefits: The overall benefits reinforce the management process of planning ahead.In fact, budget compels the managers to think and anticipate of future challenges, formulate strategies, etc so as to achieve the desired company’s goals. Also budget is in reality a set of plan.
This plan is created by all the relevant managers to create a course of action for future actions. Also to create a basis for Performance evaluation of Managers’ performance. Therefore, incentives are based on how much have been achieved against the budgeted figures. Hence, if budgets are set up realistically will assist to motive manager and employees positively.In addition it is an aid in resource planning and allocation, key or scarce resources or capital expenditure and are carefully review during the establishment of the budgets promote continuous improvement. Furthermore, budgeting is the best time for all level of manager to co-ordinate together so as to plan ahead, promotes teamwork, process improvement and goal congruency between the company and the employees.
Also delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feel that they are in control of the various business activities of the company.Overall, Budgets provide a means of communicating management’s plans through the organisation in order to force managers to think about and plan for the future in the absence of the necessity to prepare a budget. Hence, the budgeting process provides a means of allocating resources to those parts of the organisation where they can be used most effectively and along the way it provide goals and objectives that can serve as target for evaluating successive performance. Limitations: The limitations of cash budget are that it is de-motivation of employees as they feel that the budgeted figures are way too high to achieve.
Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management’s reprimanding them. A budget tends to emphasize on results and the real reasons are being ignored. Unrealistic budgets can lead managers to make decisions that might be detrimental to the company. A good example of dynamic sales budget will lead to disastrous impact like giving steep discount to increase volume. No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company.There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.
They have two roles in budgeting and this has the responsibility in opposition to controlling, for instance some costs are under the influence of more than one person, for example power costs and managers may overrate costs so that they will not be blamed in the future if they overspend. Conclusion In conclusion, budgeting is a major activity, and while it has some useful functions for businesses and organisations, it does have great limitations.