Accounting and Budgeting Process in Business - Case Study Example

Accounting and budgeting process in business Importance of accounting and budgeting process The use of both the accounting and the budgeting process I any business cannot be undermined. This importance is especially true for the small and medium sized companies and the startups. The accounting process, by definition includes the procedures and principles applied by a business to collect and process information useful in the planning of the business activities. At the very least accounting deals with the classification and recording of transactions for the business. This choice of these procedures influences the efficiency with which the business is run and the ultimate performance of the business. Managerial accounting requires that all business to have accounting systems in place for the decision making purpose and the fulfillment of the requirements put in place by the respective governments. Given that managerial accounting is concerned with the planning activities of the business as well as controlling of these activities, such procedures are critical in the overall execution of the objective of managers and /or the organization. The accounting process is considered a means to hold the managers as well as other members of staff accountable for the business activities in any given period. A budget, as defined by Finkler et al (2007), is a documented plan that acts as the roadmap for an organization to carry out its activities within a specific period of timeline. The budget process as a whole therefore include the preparation, implementation and controlling of the budget estimates. The budget is usually seen at the center of any planning made for the business with regards to expenses and incomes and potential risks and pitfalls in the course of the business. The principal role and importance of the budgeting process is that it provides an opportunity for the business to set, adopt and achieve their goals (Finkler et al 2007). Budgeting also contributes to the efficiency of the organization: managers full acknowledge their resource capacity and deficiency ensuring that they do not operate beyond their capacity. The budget is also important in acting as the coordinating, motivation, communication and controlling tools for the business especially given that the budgeting process occurs at all levels of management. As a coordinating tool therefore, a budget serves to review the activities and outcomes of each of the units in the business in the overall performance of the company. The budget is viewed as a motivating tool as it works as the guideline with which the staff operates to achieve their departmental objectives. Moreover, the motivational factor of the budget is found in the ability to measure the set goals using performance indices or other measures. The budget serves as a way to evaluate the performance of the staff in line with those measurable objectives and the target sets for each individual or department. These purposes are more profound when it comes to a small and medium business or a startup. Startups need an effective budgeting process for the purpose of resource allocation and reducing expenditures, plan for their future growth as well as creating a roadmap through which the growth can be achieved. Therefore a budget process determines the revenue model, the marketing and advertising plans, and cash requirements before launch, capital requirements and the operating expenditures. Nature of business The nature of a business does not constraint the need for the business to draw up a budget and adopt accounting process. The choice of the process does not influence these choices as the benefits drawn from them can be beneficial for the company. The company of choice is a startup in the services sector. The business will be a restaurant that is selling fast foods and drinks as well as beverages, within and takeaways. The name of the business will be Dana’s Diner. The expected customers of the diners will be mostly the locals and the targeted customers specifically will be the student of the Abu Dhabi School of Management. The main activity of the diner will be to prepare and sell fast foods, drinks and beverages for both sit in customers and the take away customers. Therefore the main product of the business is foods, soft drinks and beverages. The business is a startup that is currently being established and is expected to start operation within the year. In order to attract and serve the target customers, students, the restaurant will be situated 500m from the college. Revenue model The core activity of the business will be the sale of soft drinks, food and beverages and it will also be the main source of revenue. However given the target market, the highest source of revenues will be the drinks and the food. A prior survey and research carried out by the management revealed that the college students spent more on fast foods than they do on meals. Further management found out that the locals prefer to have quiet meetings over coffee/tea, the staff of the college and other persons from the vicinity. The realization that technology and internet plays an important role in the success of businesses has not been left out in the development of the revenue plan. The business has the option of developing a website through which they will handle orders made and deliveries within the vicinity for a start. This service will however develop to other areas as the business grows. Therefore, the revenue model will take the form of income from in-house sale, takeaways and deliveries. The food will be sold at 55AED per plate, either in-house, takeaway or delivered, while the drinks will have per unit price of 18AED and beverages will go for 13AED. In order to attract customers and pick up sales, there will be an introductory price of a 10% discount of all the items in the menu for the first week of operation. This will most likely increase sales in the long run. The revenue model will also include income from the catering services the restaurant plans to offer as well, however the revenue stream from this source cannot be established for now and it will remain to be an avenue that the business will invest in in within the five year period. The projections, as shown in the graphs, reveal that the pricing will change depending on the economic environment of the time. However, the restaurant will be looking into getting into supply agreements that do not result in an n increase in the price of the items on the menu. The projected increase in the price would be at maximum of a 5% increase, on the worst case scenarios. Research on the target customers assures the company that this change will not negatively affect the business. The range for the prices allowed being: foods 52.25AED-57.75AED; drinks: 17.1AED-18.9AED and beverages: 12.35AED-13.65AED. The accounting and the budgeting process is very critical in developing the revenue model for the business. The projection of the [ricing of the products as of the sated price ensures that the restaurant does not run any unexpected loss within any of the increase or reduction in pricing. The pricing of the products was compared to the global prices and the prevailing market prices and pegged on the expectations of our targeted customers. Marketing plan The marketing plan is the detailed outline of how the company is and will take on the marketing and advertising activities of the restaurant. These activities and strategies have been based on the study carried out on the challenges and opportunities that are inherent in the restaurant business and specifically with college students as the target market. The management has already established that the set of services and products that is intended for the market are indeed a marketable set. Data and information collected on the competitors prove that the challenges presented in the business are primarily maintaining customer loyalty and the increasing sales. The fact that our target market requires meals on the go or where they are, the use of technology and internet to make sales was born out of this gap in the market. Our research also show that the number of people that will most likely have a in house meals are considerably low and those that would need to have sit in meals are members of the staff and other locals whose primary objectives are to hold meetings and discussions that require minimum noise. Compared to other noisy paces within the area, the serene environment will be one of our selling point and unique advantage over the competitors. The marketing objectives of the restaurant have been derived from the challenges and opportunities experienced in the restaurant business. Our main marketing objective will be creating and building consumer loyalty; increase customer visits to the diner; increase sales by 20% at least in the second year of operations; build brand awareness; capture and grow the market share. The objective of building and retaining customer loyalty is based on the ever changing needs of our target customers. Millennials are easily swayed by what is trending and popular at any given time: their need to keep themselves up to date and change with the changing needs informed this objective. The customers also have a great need for being related to a certain brand that is popular and the diner intends to create this brand. On top of the list of those discovered as the needs of our millennial customers was being popular, accessibility, convenience as well as branding. Given the needs of the customers and that data collected at hand about their preferences, it is the hotels objective to fulfill these needs while achieving their own goals at an acceptable profit margin. The objective of retaining customers will mainly be achieved in the ways that the staff will be relating to the customers. It has been proven by earlier survey on the student expectation that they would prefer to be served by person who not only showed them politeness but actually served them at a personal level. This will require a need to train the staff at the onset after hiring. Therefore there will a budget allocation for the staff training. The diner also through their market strategy hope to increase the number of customer visits to the restaurant. This objective is to be achieved by setting up a serene place for mostly the needs of the college staff and the local executives. Moreover, in the age of the internet and the observed dependency and participation in the social media platforms, there is a great need for fairly fast internet speeds and the restaurant will have in place free Wi-Fi accessible within the restaurant only. Not only will the visits to the restaurant be in check but the online ordering service be checked. Not only will the use of these phone applications increase the sales as projected but they will be used in rating the service of the restaurant. A considerable focus will be placed on building the brand of the restaurant as a whole. It is the brand and its popularity that the managers are banking on in order to start the catering services in the second year after opening. The brand of the restaurant will be achieved by great service, food quality and competitive pricing of our services. This would include development of a menu that is inclusive of the local culture, international cuisine and creative dishes. It is the conclusion of the managers that having more authentic foods will be an added advantage over other restaurants in the locality. The best way to build a brand is through public relations and social media marketing before and after the opening of operations. This is from the great influence the social media outcomes has on the choices of the young people, as the managers had established through prior survey: it is the best measure of popular and trending places to visits for the students. It is believed that the achieving of these objectives will cumulatively increase the sales revenue from sales either at point of business or online. The app network offers more efficiency in ordering from the restaurant and reduces the amount of time customers have to wait to be served hence increasing the number of request for the company’s services. In addition the apps offer exposure to other users and increase networks of users hence have the possibility of increasing revenues as well. The principle of setting out marketing objectives requires that they be achievable and measureable in the process. The measurement of achievement of these objectives inherently contributes to the evaluating and monitoring tools of the budget process. In determining the effectiveness of the marketing strategy activities in customer retention, the managers will use the number of times the same customers makes a purchase or visits the restaurant in any given month. The brand loyalty will be estimated by the ratings the restaurant has in the various social media and rating platforms. Though these measures are insufficient in themselves they provide a better analysis of how customers view the restaurant. The increase in the sale revenue will be evident in the sales volume in any particular month. Capital Expenditures (capex) The restaurant as a whole has an array of capital requirements in order to start operations great portion of the cash required for starting up will go to acquiring the necessary equipment for operations of the business. The managers have decided that instead of leasing for restaurant space, they will purchase the building for which the diner will be housed. The cash outlay for the company is not enough to secure a building on 31st street hence it will buy on mortgage. The managers will have to incur more costs for the reconstruction of the building in order to serve the purpose of the restaurant. In this the mangers expect that they will incur the costs of building a kitchen, a service area and the dining area. The building is expected to have 30 year lifetime and the depreciation will be charged at 10% on straight line basis. The building costs AED1, 102,131while the construction will cost on average AED 551,065.4. Other capital expenditure includes the purchase of the kitchen equipment for cooking and baking, the coffee maker, juice maker and other necessary equipment. Inclusive in this purchase will the acquisition of tableware, utensils and dishes. All kitchen equipment and appliances are expected to have a 10 year life value and depreciation is assumed to be at 10% on straight line basis and will costs the managers on average AED 293,902. Apart from the kitchen equipment there is also the restaurant furnishings: tables and chairs, and décor estimated to cost the managers an estimate of AED 275,533. The management assumes that the furniture will have a lifetime of 5 years and there is no depreciation. Since the restaurant plans on incorporating online orders as well as the use of technology in the handling of all its operations, the managers have resorted to purchasing five desktops. 3 of the desktops will be used for the operational: two for the online platform and one for the in-house orders and the staff of the company while two will be used by management for purposes of overseeing the performance of the staff. The computers are assumed to have a depreciation of 10% over its 10 year lifetime and they will cost 1869AED each. Operating expenditures (opex) The operating expenses are the daily expenses that the managers will face in the running of the business. These expenses will include: Insurance expense: in the restaurant business where occurrence of fires is very likely, it would be prudent that the managers take out an insurance cover for the business: its property as well as the staff in general. This will serve as the fall back plan in case of destruction of the property either by natural cause or otherwise. Salaries expense: the other large and important expense that the management will have to incur will be the wages paid to the staff. As a start the management seeks to hire 5 waiters, 3 cooks, 2 assistants, a cashier, a restaurant manager who will also double up as the food and beverage supervisor, receptionist, e-commerce attendants and the security personnel. Cumulatively, these wages is expected to cost the managers AED 1,469,508. Utilities expenses: a total of AED 91,844 has been set aside in order to cover the utilities expense for the first year of operations. The utilities will cover the internet connection expenses as well as the phone services. The management also expects to incur another once off costs of AED 22,043that will be used to cover for permits and licenses for operations to start. Marketing expenses: the amount set aside for marketing expenses will include the charges on having signage, making the menus, setting up the online ordering platform, making business cards and coupons. In total this will cost the management AED 73,475. In addition there will need to be invested some amounts on the advertising of the restaurant in order to inform people of the business existence and drive traffic into their online platform. A further AED 22,043 will be put aside for public relations services. However much of the PR services and marketing will be accrued out in the social media platform hence reducing the cash requirements significantly. Cash requirements: it is not always the case that the business will pick up and maintain a steady flow of income for the management. It is therefore advisable that the management set aside some cash before the business is set out in operations to act as a buffer for the operations. This amount is projected to be close to AED 734,754. Budgeting The projections have been prepared on the going concern accounting policy and the assumption that the restaurant will be in operation for at least 5 years after its opening. References Finkler S, Baker J and Ward D 2007 essentials of cost accounting for health care organizations Burlington: Jones & Bartlett Learning Read More