Budgeting and Financial Planning for On the Beach

The management must prepare budgets and manage the plans efficiently in order to carry out the production smoothly. We have been provided with the information of “On the beach” manufacturers. The data provided to us has been used to prepare different kind of budgets. Budgeting forms a part of the financial planning. This tool of financial planning is considered to be very important as it helps to achieve the objectives of the company. Budgeting is considered to be a complex process because it requires lots of estimations on the basis of the available information (Adelaja, 2015). This assignment discusses about the forecasted result of the company.

The data which has been provided to us relating to the company has been used to calculate the expected results for the next year.  The management needs to forecast the number of units it expects to sell in the camping year for the different products in which it deals (Atkinson, 2012).

The graph provided below shows the number of units of different products that are expected to be sold in 2019:

We can observe with the help of the given graph that the sales will be maximum in the month of January but it is gradually expected to decline in the following months.

All the function like purchase, production, distribution etc has to be planned according to the sales that are expected to happen. A company will purchase materials or hire labour based on the number of units it has to produce (Berry, 2009).

The inventory level is to be maintained at a level of 50% of what is required in the next month. This has been planned by the management so that they can calculate the number of units that they should produce in the future periods.

The machine hour availability and labour along with the purchase of raw material has been planned base on this data which has been provided. It is important for the management to make optimum utilisation of the resource available to them (Bierman & Smidt, 2010).

In order to determine the total cost of production, the management has also estimated the operating costs and manufacturing costs that would be incurred. After taking into consideration all the costs and revenue data which has been forecasted the company is able to draw a conclusion about the profitability (Boyd, 2013). The profits that are expected to be earned by the company are as follows:

Budgeted Income Statement for the year ended 31 December 2019
Sales		$       23,58,600
Less cost of goods sold		$       17,91,730
Gross margin		$         5,66,870
Less Operating expenses
Utilities	$            600
Insurance	$         6,000
Administrative Wages	$      30,000
General Office Expenses	$      18,000
Rent	$      16,800
Interest	$      14,800
Total Operating Expenses		$            86,200
Net Income		$         4,80,670

Calculation of Expected Results and Profits

We can conclude from the above data that the company expects to generate $0.4 millions of profit in 2019.

There are four products that are manufactured by the company. They are- one piece, towels, beach bags and board shots.  The customers of this company are majorly attracted towards one piece. The contribution of all the products has been calculated separately in order to ascertain the profitability (Datar , 2015) .

Contribution is calculated by subtracting variable cost from sales. However, in order to determine the breakeven point (i.e. the point at which the company will have no profit/loss) contribution per unit has to be divided by the total fixed cost incurred. At the breakeven point the revenue is equal to the cost that has been incurred and that is why there is no profit or loss (Datar, 2016).

The calculation of contribution for all the products separately is shown in the table below:

Particulars	One-piece swimsuits	Board short	Towel	Beach Bag
Sales	100.00	80.00	50.00	45.00
Less: Variable Cost
Direct Materials	34.25	34.25	31.50	26.50
Direct Labour	28.00	21.00	11.20	16.80
Manufacturing Overhead (Variable)	3.00	2.25	1.20	1.80
Contribution	34.75	22.50	6.10	-0.10

From the above calculation, we can see that the product which has the highest contribution value is one piece swimsuits. This indicated that the company should focus more on producing its main product. Apart from one piece, it has also been observed that the towels and board shorts has a positive as well as sufficient contribution which will help to increase the profitability of the company. The above calculation also shows that the variable cost exceeds the sales in case of beach bags and therefore the contribution has been negative. The production of beach bags should be stopped by the management so that the company does not incur losses (Dayananda, Irons, Harrison, Herbohn, & Rowland, 2008).

Hence, we can conclude that the calculation of contribution helps the management to ascertain and analyse the profitability level of each product that it manufactures. It also helps tha management to improve its pricing policy and control costs.

Cash is required by every business to carry out its day to day operation smoothly. Cash is considered to a liquid asset of the company which helps the company to meet its short term obligations. If the company does not maintain adequate levels of cash then the company might suffer (Holtzman, 2013). This may have a direct negative impact on the productivity and profitability of the company. So, it is important for every company to maintain its cash position in the most efficient manner so that there is no situation of cash crunch.

Importance of Cash Management

The management of the company also plans for the cash cycle while preparing a budget. Cash cycle is the total time period in which the cash is received from the debtors and paid to the creditors. The cash cycle helps the management in preparing the cash budget accordingly.

The expected cash balances for 2019 are shown below:

	Total cash Receipts	Total cash Payments	Cash Balance
January	3,20,980	2,30,768	1,32,462
February	2,77,860	1,91,538	2,18,784
March	2,45,060	1,68,118	2,95,725
April	2,08,364	1,18,686	3,85,403
May	1,25,864	83,680	4,27,587
June	87,256	79,755	4,35,088
July	83,800	87,542	4,31,346
August	93,184	1,37,354	3,87,176
September	1,96,132	1,81,659	4,01,649
October	2,34,340	1,82,961	4,53,028
November	2,30,500	1,97,816	4,85,713
December	2,60,080	2,22,836	5,22,956

We can observe in the graph provided above the level of cash receipts as well as payments and the balance expected in the year 2019.  From the above graph we can see that there is an increase in the cash balance at the year end. The reason behind this is an increase in the accumulated profits. Initially, there was a fall in the cash payments and cash receipts but it recovered gradually.

If the company maintains an appropriate level of cash balance at the end of every month then the company will never face a situation of cash crunch. The company should not keep to much cash available as it will lead to loss of interest on that money. The management must invest the idle cash and try to increase the value of that money.

The budgets that are prepared must rely on actual market study and facts. It is important for the management to know about the demand of a particular product in the market so that production can be done accordingly (IBIS World). Therefore, the management has to carry out an in depth customer research and market study. In order to estimate the sales of the year 2020, the company has used the data that has been collected by IBIS world. According to the estimated data it is expected that there will be a growth of 0.8% in the retail industry. This rate has also been used to estimate the sales of “ On the beach” sales figure.

Expected demand for 2020
Sales	One-piece	Board shorts	Towels	Beach Bags
Jan-20	1,814	1,613	202	403
Feb-20	1,411	1,109	181	302
Mar-20	1,310	1,169	161	262
Apr-20	1,008	1,008	121	141
May-20	403	605	60	81
Jun-20	403	504	40	40
Jul-20	403	504	40	40
Aug-20	605	403	40	81
Sep-20	1,310	1,169	161	262
Oct-20	1,210	1,109	181	302
Nov-20	1,210	1,109	181	302
Dec-20	1,512	1,210	202	403

In the above table, the growth of the business in the retail industry is taken as 0.8% for the coming years (Siciliano, 2015). The increase in revenue is expected to be 1.2%. However, the sales price gas also been estimated accordingly.

	One-piece swimsuits	Board short	Towel	Beach Bag
Selling Price	101.20	80.96	50.60	45.54

Based on the information collected by the IBIS world, we have observed that the revenue is expected to increase by 1.2%. There should be proper evidence available for the projections that are made by the management (Warren, 2017).

Conclusion

In this assignment we have learnt that there are various tools that are used by the management of the company in order to improve their future performance. These tools help the company to make a financial plan and make a proper execution of these plans. Any variances found between the actual data and estimated data should be adjusted and corrective measures should be taken. The profitability of the company for the next year seems to be favourable. The plan created by the management should be followed with great efficiency so that the company is able to generate higher returns.

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