Analysis Of Master Budget And Formulating A Contingency Plan For Big Red Bicycle Pty Ltd

Clarification of budget/financial plans with relevant personnel

Introduction

As per the case study provided in the question, Big Red Bicycle are manufacturer of bicycle business and sell the bicycles in the local market of Australia. As per the strategic plan of the management the company aims to earns net profit before tax of $ 1,000,000. The company is also considering to expand the business by starting manufacturing in overseas market and this will also be helping the business to take advantage

The main purpose of this assignment is to analyze the master budget prepared by the management and also identify whether there are any discrepancies, also areas which are not achievable for the business and also formulate a contingency plan which can counter the risks which are faced by the business.

Budget Analysis

As per the master budget prepared by the company the figure of sales is $ 7,50,000 which is same as estimated for every year. As per the master budget of the company, all the cost and revenues which are estimated by the business keeping all the costs and revenues of the business same for each year (Rubin 2016). The master budget is for the year 2011-2012 and is compared with the actual budget of the company. The sales figure of the company as shown in the budget for the first quarter is shown at $ 6,00,000. The sales in the second quarter for the company is $ 9,00,000.  The figure of sales as per the budget is evenly spread which is not possible as it is very likely the sales of the company will fluctuate for each quarter of the company. In addition to this, the commission amount which is shown in the based on the 2% of the sale amount which might not be realistic in nature. The repair and maintenance expense which is shown by the company in the budget is not clear and have been evenly distributed among the four quarter which is $ 11,250. The repair and maintenance expenses which is shown evenly through out the years is not realistic as it is possible that in the second quarter the business might not incur any repair and maintenance expenses. The sales which is recorded is different from the management ‘s expectation of the same due to economical downfall of the market (Wildavsky 2017). 

The sales manager needs to clarify the figures of commission which is shown in the Master Budget as prepared by the company. The commission is allowed at 2% on the figures of sales. as the figure of sale is not certain, the commission which is obtained from such a source might not be reliable or accurate. The sales manager also needs to clarify from the management about the expenses which are recorded by the management such as repair and maintenance expenses which is shown for al the quarter equally as shown in the budget of the company. The management needs to change the sales figure of the company and incorporate an accurate estimate. In the case of expense, which the management expects to incur are to estimated accurately as this determine the targeted profit of the company (Henttu-Aho and Järvinen 2013). Due the fall in the sale figure the variances which can be expected by the business are more than the budgeted figure. The sales managers needs to clarify the same from the management of the company.

Dissemination of budget details to team members

Contingency plan 1

Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan: Sales Manager of Sales Centre A Name Position Sales Manager
Risk identified: Discrepancies between company’s profit goals and Budgeted Projections which can vary by 20%
Strategies/activities to minimise the risk	By when	By whom
Exploration of new markets in overseas for business in order to overcome the domestic economic condition (Talluri et al. 2013)	25th March	Sales Manager
Implementation of innovative techniques in order to gain competitive advantage which might affect company’s sales	5th June	Production Manager

Contingency plan 2

Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan: Sales Manager of Sales Centre A Name Position Sales Manager
Risk identified: Discrepancies in the commission balance from that of the Budgeted Figure.
Strategies/activities to minimise the risk	By when	By whom
Introduction of commission system which can be more effective	25th May	Operational Manager.
Implementation of Progressive Based Commission which rewards on the basis of the performance of the company.	15th October	CEO and Top level Mangement.

Figure 1: (Image Showing Budget estimates of the business)

Source: (Created by Author)

As per the budgeted estimates of the business, the financial information shows unfavourable gross profit which is due to the facts that the business is facing economic crisis and the management expects a variance of 10%. Similarly, the net profit will also be low as per management’s estimate and the result shown is unfavourable as per the budget (Mikes and Kaplan 2013).

Changes in budget

The changes which can be recommended are given below in details:

1. The overall commission of the business is kept same for every center and this is not realistic as it is clear that the such needs to be changed(Mutanov 2016). The company needs to incorporate a new plan where in the center with production is given more compensation as this way more motivation can be provided and in addition the company also needs to provide more wages to the employee of Sales Center A
2. The management needs to change the recording criteria from repairs as such expenses cannot be given for every quarter and thus such looks unrealistic in nature.
3. As per the master budget the sales of the company are evenly placed for each quarter which is unrealistic and the management needs to change the same(Popesko and Socova 2016).

As per the budget of the company, the different sales employee of the business needs to be communicated the different targets of sales which the management of the company wants to pursue. The sales employees need to be clear about the sales target of the business and also the various changes which are to be incorporated in the budget (Kerzner and Kerzner 2017).  The sales of the company as per the budget during the second quarter is more than the sales figure of all other quarter. The budget also makes it clear that the expenses of the company needs to be maintained. The cost which will be incurred by the company is estimated to be fixed through the quarters.

The financial objective of the management is to generate a net profit of $ 1,000,000. In order to achieve this the management in its budget has estimated costs to be reduced. The different sales center which are Sales Center A, B and C respectively have also been allocated their targets of the sales estimate which are to be achieved by them. The wages which have been allocated to each sales center as per the budget shows $ 1,00,000 is allocated to each center and in addition to this, supplies worth $ 1,000 is allocated to all the centers. The commission which allowable to different employee for each center’s totals to about $ 20,000. The sales manager of Center A needs to communicate the various allocations which are made. 

Financial Policies of the Company

In order to achieve the targets which are set by the budget the management of the company needs to formulate an effective training plan for the employee so that they are able to manage different resources of the business effectively. The training plan of the company will be including handling petty cash of the business, tracking of expenses with the help of spreadsheets, financial policies of the company (Gamayuni 2015).

Development of team member skills

As per the case which is provided in the question, an individual Bill has been selected to handle the petty cash for the business. Bill needs to be trained in handling spreadsheet in order to keep track of the expenses which are incurred by the management of the company. The financial policies of the business focuses on handling of petty cash expense and tracking of expenses which is the responsibility which is given to Bill. The business has the policy of reimbursing expenses which are made by the employees of the organization on behalf of the organization. The only condition is that the expenses should be a genuine one and appropriate for the business. However certain expenses will not be reimbursed for example, late fines, amount which are recoverable from third parties. In addition to this Bill also needs to learn how to use spreadsheet and implement changes in them. The spreadsheet will be useful in order to keep track of the expenses which are incurred by the business (Slezà et al. 2014).

In case of Petty cash handling, the cash ill be handled by an individual who will have a replacement in case the former is sick. In addition to this an amount which is in excess of $ 800 needs to be banked as soon as possible. The petty cash balance is to be kept in a safe and will be used to reimburse employees who have incurred expenses on behalf of the company (Hailu, Awash and Teshome 2014).

Training Plan

#	Skills/ knowledge to be developed	Training method	Resources Required	Timeframe	Review date and by whom?
Start	Finish
1	Handling and Use of formula in Ms Excel	Practical training program for MS Excel training with all the functions and formulas learning	Computer Software	2nd Quarter	Operations Manager.
2	Tracking Expenses of the company	Application of spreadsheets in order to determine the expenses which are incurred and Budgets can also be used for keeping in track of the expenses which are incurred in each quarter (Schaefer, Asteroth and Ludwig 2015).	MS Excel Software and Budgeting Techniques.	2nd Quarter	Operation Manager and Senior Accountant of the company.
3	General training for the new Recruits	Induction Training and training as per the nature of the job applied by every individual	General Resources of the company.	1st Quarter	Human Resource Manager of the company.
4	Sales operations	Communication skills development, sales records handling.	Vocational training, ledger of sales records for maintaining sales of the business	1st Quarter	Sales Manager of the company
5	Motivational and Induction training	Presentation and Surveys are used	Companies past performance and positioning of the business in the market surveys, records, charts and graphs.	1st Quarter	CEO and Managing Director of the company.

The various financial resources which are used by the management of the different departments can be done with the help of budgets which can help the management to keep track of the performance of the business.

Budget Preparation

Big Red Bicycle Pty Ltd
variance Report for the Year 2011/2012
Master Budget FY 2011/2012	Actual FY 2011/2012	Variance FY 2011/2012
		Q1	Q2	Q3	Q4	Full Year	Q1	Q2	Q3	Q4	Full Year	Variance	Variance %	Favorable or unfavourable
REVENUE
Sales		7,50,000	7,50,000	7,50,000	7,50,000	30,00,000	6,00,000	9,00,000	8,00,000	6,00,000	29,00,000	1,00,000	3%	Unfavourable
Commissions (2% sales)		15,000	15,000	15,000	15,000	60,000	12,000	18,000	16,000	12,000	58,000	2,000	3%	Favourable
Direct wages fixed		50,000	50,000	50,000	50,000	2,00,000	53,625	53,625	53,625	53,625	2,14,500	-14,500	-7%	Unfavourable
Cost of Goods Sold		1,00,000	1,00,000	1,00,000	1,00,000	4,00,000	95,000	95,000	95,000	95,000	3,80,000	20,000	5%	Favourable
Gross Profit		5,85,000	5,85,000	5,85,000	5,85,000	23,40,000	4,39,375	7,33,375	6,35,375	4,39,375	22,47,500	92,500	4%	Unfavourable
EXPENSES
General & Administrative Expenses
Accounting fees		5,000	5,000	5,000	5,000	20,000	5,500	5,500	5,500	5,500	22,000	-2,000	-10%	Favourable
Legal fees		1,250	1,250	1,250	1,250	5,000	1,125	1,125	1,125	1,125	4,500	500	10%	Favourable
Bank charges		150	150	150	150	600	175	175	175	175	700	-100	-17%	Favourable
Office supplies		1,250	1,250	1,250	1,250	5,000	1,000	1,000	1,000	1,000	4,000	1,000	20%	Favourable
Postage & printing		100	100	100	100	400	125	125	125	125	500	-100	-25%	Favourable
Dues & subscriptions		125	125	125	125	500	150	150	150	150	600	-100	-20%	Favourable
Telephone		2,500	2,500	2,500	2,500	10,000	2,800	2,800	2,800	2,800	11,200	-1200	-12%	Favourable
Repairs & maintenance		12,500	12,500	12,500	12,500	50,000	11,250	11,250	11,250	11,250	45,000	5000	10%	Favourable
Payroll tax		6,250	6,250	6,250	6,250	25,000	6,250	6,250	6,250	6,250	25,000	0	0%	Favourable
Marketing Expenses
Advertising		50,000	50,000	50,000	50,000	2,00,000	52,000	52,000	52,000	52,000	2,08,000	-8000	-4%	Favourable
Employment Expenses
Superannuation		11,250	11,250	11,250	11,250	45,000	11,250	11,250	11,250	11,250	45,000	0	0%	Favourable
Wages & salaries		1,25,000	1,25,000	1,25,000	1,25,000	5,00,000	1,25,000	1,25,000	1,25,000	1,25,000	5,00,000	0	0%	Favourable
Staff amenities		5,000	5,000	5,000	5,000	20,000	5,750	5,750	5,750	5,750	23,000	-3000	-15%	Favourable
Occupancy Costs
Electricity		10,000	10,000	10,000	10,000	40,000	9,500	9,500	9,500	9,500	38,000	2000	5%	Favourable
Insurance		25,000	25,000	25,000	25,000	1,00,000	25,000	25,000	25,000	25,000	1,00,000	0	0%	Favourable
Rates		25,000	25,000	25,000	25,000	1,00,000	25,000	25,000	25,000	25,000	1,00,000	0	0%	Favourable
Rent		50,000	50,000	50,000	50,000	2,00,000	50,000	50,000	50,000	50,000	2,00,000	0	0%	Favourable
Water		7,500	7,500	7,500	7,500	30,000	8,750	8,750	8,750	8,750	35,000	-5000	-17%	Favourable
Waste removal		12,500	12,500	12,500	12,500	50,000	15,000	15,000	15,000	15,000	60,000	-10000	-20%	Favourable
TOTAL EXPENSES		3,50,375	3,50,375	3,50,375	3,50,375	14,01,500	3,55,625	3,55,625	3,55,625	3,55,625	14,22,500	-21000	-1%	Favourable
NET PROFIT (BEFORE INTEREST & TAX)		2,34,625	2,34,625	2,34,625	2,34,625	9,38,500	83,750	3,77,750	2,79,750	83,750	8,25,000	113500	12%	Unfavourable
Income Tax Expense (25%Net)		58,656	58,656	58,656	58,656	2,34,625	20,938	94,438	69,938	20,938	2,06,250	28375	12%	Favourable
NET PROFIT AFTER TAX		1,75,969	1,75,969	1,75,969	1,75,969	7,03,875	62,813	2,83,313	2,09,813	62,813	6,18,750	85125	12%	Unfavourable

The variance report as prepared by the management of the company shows that the gross profit figure of the company shows an unfavorable balance. Similarly, the net profit figure of the company is also showing an unfavorable balance as per the case. The management needs to plan for such variances as such are above the 10% mark which was expected by the business. The variance in net profit is 12% which will affect the ability of the company to meet the obligations of the company.

Modified Contingency Plan

Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan:  Name : Position: Managing Director
Risk identified: Profit for FY more than 10% less than budgeted
Strategies/activities to minimise the risk	By when	By whom
Produce quarterly variation reports to identify income/ expenditure and profit shortfalls over 10%.	Q2	Operations Manager
Implement sales training/coaching.	Q2	Sales Manager
Implement incentives program.	Q2	Operation Manager
Reduce overtime.	Q2	Managing Director

Modified Contingency implementation plan

Risk identified: Reduction in Net profit
Activity	Monitoring activity and date	Person/s
Monitor variance.	Completion of report: Q2.	Operation Manager
Analysis of report to identify issues.	Management report: Q2.	Operation Manager
Email to warn employees of risk to jobs.	Monitoring of variation report results: Q4.	Sales Manager
Email to announce rise of commission from 2% to 2.5%.	Monitoring of variation report results: Q3.	Sales Manager

Activity 1

Particulars	Formula	Days
Average Debtors Day	[Trade Debtors/(Total Sales x 50%)] x 365 days	91.25
Average Creditors Day	[Trade Creditors/Total Purchase] x 365 days	97.33
Average Stock Turnover Days	[{(Op. Inventory + Cl. Inventory)/2}/Cost of Goods Sold] x 365	57.63

 The recommendation which can be given to the company in order to improve the financial management process of the business are given below:

1. The company in order to ensure that the cash balance is maintained, needs to have a smooth policy for collection of money from the debtors. In order to incorporate such a measure, the management needs to incorporate strict debtor collection policy(Deville 2015). This will also ensure that the company has ample cash so that any liquidity requirement can be fulfilled.
2. The management should conduct a meeting with the creditors of the company in order to come to a more favourable credit repayment terms considering the liquidity requirements of Big Red Bicycle Company.
3. The inventory turnover of the business can be improved further in order to ensure that the sales of the company is not reduced and appropriate cash balance is maintained by the company. 

The sources from which all the relevant information is collected are given below:

1. Books of Accounts which consist of Journal, ledgers
2. Profit and Loss Statement of the Company
3. Statement Showing Financial Performance of the Company

Activity 2

Particulars		Amount
Selling Price p.u.	A	$500
Variable Cost per unit	B	$250
Contribution Margin	C=A-B	$250
Fixed Expenses	D	$12,80,000
Target Profit	E	$10,00,000
Target Sales Volume (in units)	F=(D+E)/C	9120
Particulars		Amount
Fixed Expenses	A	$12,80,000
Target Profit	B	$10,00,000
Current Manufacturing Capacity	C	8000
Contribution Margin p.u.	D=(A+B)/C	$285
Selling Price per unit	E	$500
Variable Cost per unit	F=D-E	$215

Recommendations

The recommendation which can be suggested for further improvements are given below:

1. The variable costs are a bit which can be reduced if the management of the company negotiates with the supplier to offer discounts or reduce costs which can improve the contribution margin and the profit of the business.
2. The company can look for other suppliers and other production areas which can reduce the costs associated with the business. The new production site can improve the business factor as well as reduce the cost of the business. 

The sources through which the above information can be collected are given below:

1. Books of Accounts which consist of Journal, ledgers
2. Profit and Loss Statement of the Company
3. Statement Showing Financial Performance of the Company
4. Various Reports of the company can also be used

Activity 3

In order to satisfy the GST record maintenance requirements of the Australian Tax Office (ATO), the company needs to maintain the GST records of the business for a minimum period of Five years (Rastogi 2016).

	July	August	September
Budgeted cash receipts incurring GST:
Cash sales	20,000	10,000	10,000
Cash revenue (besides sales)	0	0	0
Cash receipts from sale of assets (not stock)	0	0	0
Total receipts for GST	20,000	10,000	10,000
Budgeted non-cash receipts incurring GST:
Debtors sales	1,80,000	2,30,000	1,50,000
Total non-cash receipts:	1,80,000	2,30,000	1,50,000
Total budgeted receipts incurring GST	2,00,000	2,40,000	1,60,000
Budgeted cash payments incurring GST
Cash purchases of stock	0	0	0
Cash expenses	4,300	5,200	5,250
Total cash receipts incurring GST	4,300	5,200	5,250
Budgeted credit payments incurring GST
Credit purchases of stock incurring GST	25,000	30,000	25,000
Credit purchases of assets (besides stock)	4,300	5,200	5,250
Total cash payments incurring GST	29,300	35,200	30,250
Total budgeted cash payments incurring GST	33,600	40,400	35,500
GST cash budget calculations
a)  Cash receipts	2000	1000	1000
b)  Cash payments	430	520	525
c)  GST liability	1570	480	475

Activity 4

The recommendation to provide strict policies for debtor is shown below with the implementation plan of the management:

Activity	Monitoring activity and date	Person/s
Communication of requirement to enforce terms to sales team and ensure that the credit sales period allowed to debtors is reduced	Quarter 1, week 1 Completion and Reviewing of the Policy in week 4 of Quarter 1	Operation Manager
Revising the credit policy of the company and ensuring that the credit sales option is given to regular customers or clients with bulk orders	Quarter 1 week 1 Revision of Sales strategy.	Sales Team Managers
Discount facilities in case of earlier collection of credit sales by the debtors	Quarter 2 week 1. Analysis of the Strategy and Further incorporation of the discount facility.	Sales manager

References

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