An Analysis of a Budget Proposal - Assignment Example

An analysis of a budget proposal Background: Assumptions used. The proposed magazine will focus on interior design and DIY and will be considered as a separate division of the company. The proposed magazine will be published once a month. Target number of publication per month is 25,000 pcs. The projected selling price and revenues have been estimated as follows: Wholesale price – £1.85 Retail price - £3.25 Advertising revenue 35,000 per month Magazine sales 46,250 per month Task 1. Discuss with the owners the need for realism in considering budgets, what questions would you ask them about how they arrived at the budgeted figures and what advice could you give them? As a Finance Analyst, I will ask the owners where they have based the figures of the heir projections. Since this will be a new venture for the company, there is no past data from which a comparison could be derived from and information needs to be gathered elsewhere. A budget calls for realism that would be based on established facts and not on hunches only, and it is necessary to find out where the figures have been based. To start with, there is a need to view the competition in this kind of magazine, and find out if it satisfies the need of the potential customers. The magazine is about interior design, so there is a need to consider the population and the economic growth in the location, and lastly, according to a study, it is necessary that a customer profile be developed. (“Conduct a ….”) Other questions have to be identified also for smooth planning, such as: a. What are the objectives of the project? b. What activities will be involved in achieving these objectives? c. What resources will be needed to perform these activities? d. What will these resources cost? e. Where will the funds come from? f. Is the result realistic? Task 2. Discuss with the owners what issues and external influences would you suggest they should consider that might affect the accuracy of the forecasts. Accuracy of forecast is often influenced by external factors such as the trends in the industry, size and location of the planned area. A planned area, according to “Conduct a sales forecast” is “how far your customer will travel to shop, as well as how far you are prepared to distribute your product”. My suggestion in this area is for the company to establish familiarity with the trading area, which could be done by talking to neighborhood business owners, contracting the Chamber of Commerce, and use of other media. As this is a new venture, accuracy of forecasts of sales will be an influence of competition, which is done by getting an estimate of the average of the monthly sales of similar-sized competitors. I would further suggest the need to study the quality of the competitors’ publication, prices, promotional techniques and other similar techniques Other influences are: “Seasonality of the business, relative state of the economy, direct and indirect competition, political events, styles or fashions, consumer earnings, population changes, weather and productivity changes” “(“Conduct a…” 2009) Task 3. Explain to owner what actions can be taken to: a. Monitor the budget – Budget planning is a step that allows management to think creatively about the future of the business. The budget, once approved and implemented, becomes the benchmark by which management can measure actual results, thus it becomes the standard in evaluating the performance of the profit center. Thus, in our study, a target budget of expenditures and expected revenues has been planned on a monthly basis. Actions that can be taken to monitor a budget includes scrutinizing accounting records, regular preparation of financial statements, review of the sales calls reports and after sales demands from clients. (“Conduct a…”.) b. Deal with variances in actual and budgeted figures due to: issues which the organizations has influence over or variances has no control over. The budget provides a basis for the financial evaluation once it has been set and operational. The basic purpose of this report is to know how successful has been the operations of the magazine for the specified period. The periodic report will show variances between the actual figures and the budgeted figures. From there, the underlying reasons or issues (Gordon, et al. 1969. p. 749) could be resolved and should satisfactorily answer the following questions: how successful have been the operations of the magazine on a quarterly basis what opportunities or problems have arisen that can be seen from the budgetary plan finally, should the operations be continued or discontinued. Task 4. Put together a budgeted profit and loss statement, a cash flow forecast and calculate a break even point for the publishing venture and comment on your findings in a short report. The Proforma Profit and Loss Statement and a Cash flow Forecast are attached. Figures used on this budget have been based on data given by the company which is said to have been a product of thorough research. Both statements show profitability of operations and that net profit indicates there are still resources left in the budget to pay other accountabilities such as taxes, debts, interests and capital ownership. The cash flow done on a monthly basis also shows that there are surpluses of cash flow after paying all the budgeted expenses. Break even point of sales is estimated at £183,526 which is 53% of break even during the period covered, which is one year of operation. MEMORANDUM REPORT Prepared by: Financial analyst Subject: Budgeted Profit and Loss Statement, Cash Flow Forecast and break even point - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - In reply to your instructions, I am submitting my findings on the proposed publication of the Porter Meritt Advertising Agency. Highlights of the report are summarized below: 1. Profit center I hold the same opinion that the publishing side of the business should be established as a separate concern because profitability of the project could be identified and monitored easily. As a profit center, it will be a simple task for the management to look at the outcome of the project, check on the budget and expenses and find out without difficulty if the targets are achieved. 2. Profit and loss statement and cash flow. On a monthly basis, the profit and loss statement, as shown in the computations attached will be able to maintain operations viably and generate a modest income. The cash flow forecast is done also on a monthly basis figuring out the monthly magazine sales and advertising revenues. The statement enables us to see the cash flowing in and out of the organization, and enables management to plan for surpluses and deficits. As shown, the monthly revenues can support the projected usage of funds and holds surpluses that can be used by management for future plans. 3. Break even point The break even point in this study has been calculated using the profit and loss statement as the basis. “Break-even point is the point in sales volume or revenue where direct costs have been recovered, fixed overhead expenses have been absorbed and where profit begins.” (Normand, Bob. 2006) In this context, the BEP of the proposed project has been calculated as follows: Sales £975,000 Cost of goods sold £300,650 Gen. & administrative £127,000 Break Even Point = FC / (1-VC /S) Where VC /S = £300,650 / £975,000 = 0.308 1- 0.308 = 0.692 BEP is FC / (1-VC/S) = £183,526 BEP This means that the company operated at £975,000. / £183,526 that is equivalent to 53% of break even during the period. Please see attachments. Attachments: Profit & Loss Statement Cash flow statement Break Even Point calculation Attachments: PORTER MERITT Interior Design Magazine Proforma Profit & Loss Statement One year period Monthly Total Sales Projections 25,000 x 1.85 555,000.00 Advertising sales 35,000 x 12 420,000.00 Total Projected Sales 975,000.00 Less: Cost of Sales Printing cost 8,500 x 12 102,000.00 Staff & editorial cost 12500 mo 150,000.00 Website maintenance 1200 mo. 14,400.00 One off cost Design & build of website 1,800.00 Professional fees 2,200.00 Bank draft arrangement fee 250.00 Distribution cost 30,000.00 Total cost of sales 300,650.00 Gross Profit 666,850.00 Less indirect cost Apportioned rent and rates 17,500.00 TV advertising 46,000.00 Insurance 5,800.00 Admin/support staff 3,500 per month 42,000.00 Motor & other expenses 595 per month 7,140.00 Telephone 360 month 4,320.00 Power lighting & heating 370 month 4,440.00 Total indirect cost 127,200.00 Net profit 539,650.00 To calculate break even point Sales 975,000.00 Cost of goods sold 300,650.00 Gen. & administrative 127,000.00 Break even point = FC / (1-VC/S) VC/S 300,650 / 975000 0.308358974 1-VC/S 1-0.308 0.692 FC /(1-VC/S) 183526.0116 BEP 5.31259876 And the company operated at 975000/183, 526, equivalent to 53% of break even during the period Source of formula: Normand, B. 2006 CASH FLOW PROJECTIONS FOR PORTER MERITT Projections Jan Feb Mar Sources of funds Beginning cash 0 47,475.00 99,200.00 Sales of magazine 555,000.00 46,250.00 46,250.00 46,250.00 Advertising sales 420,000.00 35,000.00 35,000.00 35,000.00 Total 975,000.00 81,250.00 128,725.00 180,450.00 USES OF FUNDS Direct printing costs 102,000.00 8,500.00 8,500.00 8,500.00 One off costs 4,250.00 4,250.00 Apportioned rent & rates 17,500.00 8,750.00 TV advertising 46,000.00 11,500.00 Insurance 5,800.00 Distribution cost 30,000.00 2,500.00 2,500.00 2,500.00 Staff & editorial cost 150,000.00 12,500.00 12,500.00 12,500.00 Website maintenance 14,400.00 1,200.00 1,200.00 1,200.00 Admin/support 42,000.00 3,500.00 3,500.00 3,500.00 Motor and other expenses 7,140.00 595.00 595.00 595.00 Telephone 4,320.00 360.00 360.00 360.00 Power, lighting & power 4,440.00 370.00 370.00 370.00 Total cash out 427,850.00 33,775.00 29,525.00 49,775.00 Net cash flow 547,150.00 47,475.00 99,200.00 130,675.00 2nd quarter April May Jun Sources of funds Beginning cash 130,675.00 182,400.00 234,425.00 Sales of magazine 46,250.00 46,250.00 46,250.00 Advertising sales 35,000.00 35,000.00 35,000.00 211,925.00 263,650.00 315,675.00 USES OF FUNDS Direct printing costs 8,500.00 8,500.00 8,500.00 One off costs Apportioned rent & rates TV advertising 11,500.00 Insurance 5,800.00 Distribution cost 2,500.00 2,500.00 2,500.00 Staff & editorial cost 12,500.00 12,500.00 12,500.00 Website maintenance 1,200.00 1,200.00 1,200.00 Admin/support 3,500.00 3,500.00 3,500.00 Motor and other expense 595.00 595.00 595.00 Telephone 360.00 360.00 360.00 Power, lighting & power 370.00 370.00 370.00 Total cash out 29,525.00 29,525.00 46,825.00 Net cash flow 182,400.00 234,425.00 268,850.00 3rd quarter July August September Beginning cash 268,850.00 311,825.00 363,550.00 Sales of magazine 46,250.00 46,250.00 46,250.00 Advertising sales 35,000.00 35,000.00 35,000.00 350,100.00 393,075.00 444,800.00 USES OF FUNDS Direct printing costs 8,500.00 8,500.00 8,500.00 One off costs Apportioned rent & rates 8,750.00 TV advertising 11,500.00 Insurance Distribution cost 2,500.00 2,500.00 2,500.00 Staff & editorial cost 12,500.00 12,500.00 12,500.00 Website maintenance 1,200.00 1,200.00 1,200.00 Admin/support 3,500.00 3,500.00 3,500.00 Motor and other expenses 595.00 595.00 595.00 Telephone 360.00 360.00 360.00 Power, lighting & power 370.00 370.00 370.00 Total cash out 38,275.00 29,525.00 41,025.00 Net cash flow 311,825.00 363,550.00 403,775.00 4th quarter October November December Beginning cash 403,775.00 455,500.00 507,225.00 Sales of magazine 46,250.00 46,250.00 46,250.00 Advertising sales 35,000.00 35,000.00 35,000.00 485,025.00 536,750.00 588,475.00 Uses of funds Direct printing costs 8,500.00 8,500.00 8,500.00 One off costs Apportioned rent & rates TV advertising 11,500.00 Insurance Distribution cost 2,500.00 2,500.00 2,500.00 Staff & editorial cost 12,500.00 12,500.00 12,500.00 Website maintenance 1,200.00 1,200.00 1,200.00 Admin/support 3,500.00 3,500.00 3,500.00 Motor and other expenses 595.00 595.00 595.00 Telephone 360.00 360.00 360.00 Power, lighting & power 370.00 370.00 370.00 Total cash out 29,525.00 29,525.00 21,025.00 Net cash flow 455,500.00 507,225.00 567,450.00 References List “Conduct a Sales Forecast” (2009) Virtual Advisor, Inc. viewed 28 July 2010 from http://www.va-interactive.com/inbusiness/editorial/sales/ibt/sales_fo.html. Myron, G. & Shillinglaw, G. (1969). Budgetary Planning and Control System. Accounting – a Management Approach. Richard d. Irwin Inc., Homewood, Illinois., pp. 749-750 Normand, Bob. (2006). How to calculate your break even point and how to use it”. Institute for Smart Business Management. Search Warp.com. Viewed 28 July 2010 from http://searchwarp.com/swa63321.htm Read More