Need For Budgeting, Budgeting Techniques And Limitations

Budgeting Techniques

Task 1

Write a 400-word introduction on the need for budgeting, the process for preparing budgets and their limitations.

Task 2

Prepare the following documents for the first six (6) months of the hotel’s operation:

A cash budget

A budgeted income statement

A budgeted statement of financial position

Task 3

Calculate the payback period using both the payback method (8 marks) and the discounted payback method (12 marks), as well as the NPV of the project (15 marks), assuming the following:

A cost of capital of 7%, using four decimal points on the discount factor;

Net cash flow will grow 3% on a year basis compared to previous year; and

John hopes to sell the hotel at the end (October 1) of the tenth year for £3,200,000.

This Report is intended to analyze the investment proposal to invest in the hotel industry. (Donovan, 2006)To analyze, initially budgeting techniques such as preparation of cash budget, budgeted income statement and budgeted balance sheet.

A budget is an arrangement for your future pay and uses that you can use as a rule for spending and sparing. Albeit numerous Americans as of now utilize a budget to arrange their spending, the greater part of Americans likewise routinely spends more than they can bear. The way to spending inside of your methods is to know your costs and to spend short of what you make. A decent month to month budget can guarantee you pay your bills on time, have assets to cover startling crises, and achieve your money related objectives.

The greater part of the data you need is as of now readily available. To make or revamp your budget, take the basic steps sketched out underneath to get an unmistakable photo of your month to month funds. (Hammonds, 2006)You can likewise utilize our free internet budgeting number crunchers underneath to budget for certain particular buys or occasions. (Hammonds, 2006)

The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources.

The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost.

Cash Budget

The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. (Sinclair, 1934)The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders.

The budgeted income statement is an important part of a business’s financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them.

A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement. (Reilly & Brown, 1997)

Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement.

A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement.

Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement.

Balance Sheet
Assets
Fixed assets	April	May	June	July	August	September
Lease Hold Property	1,600,000	1,600,000	1,600,000	1,600,000	1,600,000	1,600,000
Furniture and fittings	150,000	150,000	150,000	150,000	150,000	150,000
Kitchen Equipment	50,000	50,000	50,000	50,000	50,000	50,000
Laundry equipment	25,000	25,000	25,000	25,000	25,000	25,000
Gym equipment	15,000	15,000	15,000	15,000	15,000	15,000
China, glass and cutlery	10,000	10,000	10,000	10,000	10,000	10,000
Bed linen and towels	15,000	15,000	15,000	15,000	15,000	15,000
Accumulated Depreciation	(4,875)	(9,750)	(14,625)	(19,500)	(24,375)	(29,250)
	1,860,125	1,855,250	1,850,375	1,845,500	1,840,625	1,835,750
Current Assets
Cash	127,430	150,515	182,645	236,240	303,065	368,270
Inventory	15,000	10,000	10,000	10,000	10,000	10,000
Account receivable	28,350	49,950	82,350	113,400	121,500	102,600
	170,780	210,465	274,995	359,640	434,565	480,870
Current Liabilities
payable (COGS)	6,480	10,260	17,280	23,220	24,300	19,980
Payable OH	2,025	2,700	4,725	6,075	6,075	–
	8,505	12,960	22,005	29,295	30,375	19,980
Equity
Capital	2,000,000	2,000,000	2,000,000	2,000,000	2,000,000	2,000,000
Retained Earning	17,400	42,225	89,325	151,275	213,225	260,325
	2,017,400	2,042,225	2,089,325	2,151,275	2,213,225	2,260,325

The budgeted income statement is an important part of a business’s financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them.

	April	May	June	July	August	September
Sales	40,500	54,000	94,500	121,500	121,500	94,500
Cost of sales	8,100	10,800	18,900	24,300	24,300	18,900
Labor Cost	8,100	10,800	18,900	24,300	24,300	18,900
Overhead Costs	2,025	2,700	4,725	6,075	6,075	4,725
Depreciation Per Month	4,875	4,875	4,875	4,875	4,875	4,875
Income	17,400	24,825	47,100	61,950	61,950	47,100

The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources.

The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost.

The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders.

Cash Budget	April	May	June	July	August	September
Opening	125,000	127,430	150,515	182,645	236,240	303,065
Sales	12,150	44,550	66,150	102,600	121,500	113,400
COGS	1,620	8,640	12,420	19,980	24,300	23,220
Labor cost	8,100	10,800	18,900	24,300	24,300	18,900
Overhead expenses		2,025	2,700	4,725	6,075	6,075
Closing	127,430	150,515	182,645	236,240	303,065	368,270

Net Present Value
	–	1	2	3	4	5	6	7	8	9	10
Investment	(2,000,000)
Cash Inflows		1,401,624	1,443,673	1,486,983	1,531,592	1,577,540	1,624,866	1,673,612	1,723,821	1,775,535	1,828,801
Cash Outflows		(595,690)	(613,561)	(631,968)	(650,927)	(670,455)	(690,568)	(711,285)	(732,624)	(754,603)	(777,241)
Disposal											3,200,000
Net cashflow	(2,000,000)	805,934	830,112	855,015	880,666	907,086	934,298	962,327	991,197	1,020,933	4,251,561
Net Present Value	5,616,951

Since the Net Present Value is positive, an investment is recommended.

Payback	Cash Flow	Cumulative
Year 0	(2,000,000)	(2,000,000)
Year 1	805,934	(1,194,066)
Year 2	830,112	(363,954)
Year 3	855,015
Year 4	880,666
Year 5	907,086
Year 6	934,298
Year 7	962,327
Year 8	991,197
Year 9	1,020,933
Year 10	4,251,561
Payback Period
	1.00
	0.43
Payback Period	1.43

As per the above analysis, the payback period would be 1.4 years thus an investment is recommended.

Discounted  payback	Cash Flow	Discount rate	Discounted Cash flow
Year 0	(2,000,000)	1.000	(2,000,000)
Year 1	805,934	0.935	(1,194,066)
Year 2	830,112	0.873
Year 3	855,015	0.816
Year 4	880,666	0.763
Year 5	907,086	0.713
Year 6	934,298	0.666
Year 7	962,327	0.623
Year 8	991,197	0.582
Year 9	1,020,933	0.763
Year 10	4,251,561	0.763
Payback Period
	1.00
	1.40
Discounted Payback Period	2.40

As per the above analysis, the discounted payback period would be 2.4 years thus an investment is recommended.

References

Donovan, S. (2006). Budgeting. Minneapolis: Lerner Publications Co.

Elton, E., & Gruber, M. (1995). Modern portfolio theory and investment analysis. New York: Wiley.

Hammonds, H. (2006). Budgeting. North Mankato, MN: Smart Apple.

Prime, J. (1967). Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall.

Reilly, F., & Brown, K. (1997). Investment analysis and portfolio management. Fort Worth, Tex.: Dryden Press.

Sinclair, P. (1934). Budgeting. New York: Ronald Press Co.

Weaver, D. (1971). Investment analysis. London: Longman [for] the Society of Investment Analysts.

Williams, E., & Findlay, M. (1974). Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall.

Wiseman, B. (2010). Budgeting. New York, NY: Weigl Publishers.