Reasons for Company Budget
The main reason why businesses need a budget is to aid in the planning of the business operations. Budgets act as a tool that helps in determining the scope of business activities, the needed resources, and the efficiency in their use (Vaznoniene & Stonciuviene, 2012). The budget helps in promoting harmonization of business activities and cooperation between business segments. They make it easy to allocate the expected expenses, form important elements of the staff’s performance evaluation system as well as crucial for internal control within the organization (Ojua, 2016). Proper budgets will assist a business in maintaining a continuous track of the financial situation.
Operating a business with a budget is an important process in the management of the financial performance. Through developing and managing the budget, the Erin McKenna, the owner of Babycakes NYC, indicates that it makes the business to be more efficient, facilitates the evaluation of the performance of the company, and allows prudent financial expenditure. A budget allows a business to anticipate the sales levels and thereby match the resources required for production to sustain the desired production level. This is evident at Babycakes NYC, which through budgeting for valentine’s day, was able to meet the influx in the sales, without overproduction, and had enough stock for production required for the following day.
Operating without a budget would ultimately lead to poor cash flow. A budget helps in anticipating when revenues are expected to be received, and the bills are due for payment. Budgets, therefore, help a business overcome the trend of spending more than it actually has. The owner of Babycakes notes this outcome, as she highlights how lack of budget would likely make her overspend since there are many things that she feels she needs to do for the bakery.
|October||November||December||Total (4th Quarter)|
Benefits of Using a Flexible Budget
A flexible budget is a forecast of the expenditure that is based on different activity levels. A flexible budget is used in scenarios where there are foreseeable changes in the volume of activity that a business engages in. In the case of Babycakes NYC, it is clear that the levels of sales are likely to be much higher during the holidays such as Halloween, Thanksgiving, and Christmas. This necessitates the need to adopt different volumes of work units. To effectively use a flexible budget, it is essential that the costs behavior compared to the volume of activity be known. Flexible budgets are influenced by the variable and fixed costs. Fixed costs remain the same irrespective of the level of activity while the variable costs match up with the volume of work (Radu & Giju, 2015).
A flexible budget represents a series of budgets that are prepared to account for sales at different levels of activities. A major benefit of the flexible budget is that it allows for adjustments in the course of the year for actual sales levels and costs of production. The flexibility provides a leeway to the business to adapt to changes. This was evident in the flexible budget prepared for Babycakes NYC that is able to adjust the production levels to fit the surge in demand during the holidays. This allows the business to take advantage of opportunities. In such a scenario, the business can plan how to take advantage of the increase in revenues.
The flexible budgets seek to overcome the shortcoming of the static budget that is characterized by an inability to changing to fit the environment where the business operates in. Flexible budgets are adjusted in response to changes in the product demand or laws. It is noted that another main benefit of flexible budgets over a static budget is that they allow the evaluation of staff performance based on the attainment of specific budget indicators. Static budgets tend to evaluate the employee’s performance based on planned situations as opposed to the actual situation. Such a scenario is noted to be a demotivator and leads to a situation where employees misrepresent the budgetary data to gain in the performance evaluation. This is where the flexible budget comes in handy as it attempts to overcome the budget-connected issues (Vaznoniene & Stonciuviene, 2012). This is achieved by accommodating changes whenever changes in the circumstances are anticipated, which can be affected even before the end of the year. This is evident in the sales budget for Babycakes NYC, which shows a relationship between the budget and the real environment.
Modifications and Corrective Actions
Among the key challenges faced in the budgeting process is a budget variance that may be caused by tendencies of overspending. A budget variance arises where is a difference between the budget and actual figures. An initial step in taking the corrective action is carrying out a variance analysis. Variance analysis seeks to answer the question of why the actual results were off the target. This would address the main causes of overspending being experienced in the bakery. It is clear that Erin McKenna, the owner at Babycakes, did a variance analysis in her first year when she had underestimated demand on valentine’s day. She was able to get valuable lessons that have assisted her in making plans for meeting the surge in sales on the valentine’s day and avoid any urge to overspend.
Another key challenge that needs to be tackled is related with the purpose of a budget as a means of performance evaluation. This leads to a problem of using a historical data in judging performance, which might lead to concealing the inefficiencies in the past performance and thereby allowing tendencies of overspending. This may be corrected through the process of budgetary evaluation where the budget variance is traced back to the respective department. Using budgets as a means of performance evaluation has an effect on behavior attitude and performance of the participant. The use of budget as an evaluation tool may lead to reduced motivation and negative attitude among the participants. The corrective action that can be undertaken to deal with this is the use of a reward system of the organization, which encourages the maximization of the contribution towards the organization’s objectives (Obi, 2015).
A key corrective action that is made possible through the use of a flexible budget is based on reliance on current data. In taking this corrective action, the flexible budget unlike the static budget uses the prevailing current conditions and thereby accommodating adjusting as per the spending levels. At Babycakes, Erin takes into consideration the current data in making budgets for the new store in a way that it considers the surge in demand for the holidays while considering the required resources for the following day.
Obi, J. N. (2015). Budgeting and Budgetary Control as The Metric for Corporate Performance. International Journal of Sustainable development, 3(1), 1-33.
Ojua, O. M. (2016) The Importance of Budget and Budgetary Process Among Non-Publicly Accountable Entities (NPAEs): A Survey of Micro-Sized Firms in Nigeria. The International Journal of Business & Management, 4(7), 305-312.
Radu, M., & Giju, G. C. (2015). The Flexible Budget–Basic Tool of The Management Control in The Economic Entities. Scientific Bulletin-Economic Sciences, 14(1), 3-10.
Vaznoniene, M. (2012). Corporate budgets and their limitations: a case study of meat and poultry producers. Economics and Rural Development, 8(2), 37-49.
Vaznonienė, M., & Stončiuvienė, N. (2012). The formation of company budgeting system: importance, problems, and solutions. Management theory and studies for rural business and infrastructure development, 30(1), 157-170.
Usual Day= 0.5 of valentine’s days
= 0.5 X 1500
= 750 cupcakes per day
Holiday= Usual day sales + 500 units
= 1250 cupcakes
|Holidays||1 (Halloween)||1 (Thanksgiving)||1 (Christmas)|
|Sales (Usual days)||30*750= 22500||29*750= 21750||30*750= 22750|
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