The Importance Of Budgeting In Planning For Future Profitability

Advantages of Budgeting

The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some methods to deal with the uncertainty of the future (Hope, J., 2015). Various additional advantages result from the training and utilization of budgets. for instance: (1) industries perform as per their better coordination (2) executive become conscious about the plans of the other manager’s tactics (3) workers turn out to be extra cost conscious and made a attempts to preserve resources (4) the corporation supervise the strategies and transformation whenever it is required.  Its and (5) executive promote a vision that is not executed yet.

The outcomes that are offered by the planning procedure is a huge opportunity for different levels of administration to believe throughout and entrust future tactics to writing. Additionally, a correctly organized budget permits the organization to pursue the management-by-exception standard by concentrating on awareness towards the consequences which stray considerably from intended levels (Morgan and et al., 2017).  However, these are the following reasons by which a budget ought to evidently imitate the predictable results. 

Table 1: Monthly sales budget

sales	July Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	August	September
Food Sale	80000	75000	75000
Beverage sale	60000	58000	58000
Function Sale	100000	100000	80000
Total sale	240000	233000	213000

The total sale in the month of July, for the food sale, was 80000; therefore the daily sale was 2580.06, monthly beverages sale was 60000. Therefore the daily sale was 1936, and monthly function sale was 100000, so the daily sale was 3226. The total daily sale in the month of July was 7742. Further in the month of August the daily food sale was 2419, Beverage sale was 1871, and function sale was 3226. Therefore the total daily sale in the month August was 7516. For the month of September, the daily sale was for the food in 2500; the Beverage sale was 1933 and function sale was 2667. Therefore the total daily sale in the month of September was 7100.

It has been seen that daily budgeted sale of the restaurant in the month of the July was maximum and the function element of the restaurant gives the maximum revenue to the organization. Further in the month of the August, the sale of the function element of the restaurant was same as in the month of the July; however, there was the reduction in the sale food and beverage sale of the restaurant. Further, in the month of September, the sales were even less than as compared with the month of August.

Sample Monthly Sales Budget

In the month of July, the allocation to the food cost was 36% (45000/125000*100), August 32% (40000/125000*100) and in the month of August 32% (40000/125000*100). In case of beverage the total allocation in the month of July 35.72% (20000/56000*100), August 32.14% (18000/56000*100) and in September 32.14% (18000/56000*100).

Table 2: Weekly allocation of the food and beverage purchase

	July	August	September	Total
Food cost	11250	10000	10000	31250
Beverage cost	5000	4500	4500	14000

The weekly allocation in terms of the percentage will remain the same, as stated above. However in terms of the amount the weekly purchase of the food and beverages given below-

In the month of August and the September, the allocation of the Food and the Beverage cost was the sale. However, due to the increased sale in the month of the July, the purchase cost allocation was also more as compared with the other two month.

The labour cost includes the superannuation cost also.

Table 3: Weekly allocation of the labour cost

	July	August	September	Total
Wages-Base salary	18750	18750	18000	55500
Superannuation	1875	1875	1800	5550

Superannuation was the 10% of the wages. In the month of July and the August, the labour cost of the Restaurant was the same. However, in the month of the August, there was the slight reduction in the labour cost.

Table 4 comparison between the budgeted and actual figures of July

Particulars	July (Budgeted)	July(Actual)
Food Sale	80000	78610
Beverage sale	60000	61440
Function Sale	100000	97500
Total sale	240000	237550
Food cost	45000	47623
Beverages cost	20000	24982
Marketing	1200	1300
Rent	18000	18000
Telephone	500	440
Miscellaneous	1500	1399
Utilities	3000	3561
Wages-Basic Salary	75000	74160
Superannuation	7500	7416
Total Operating Expenses	171700	178881
Net Profit/Loss	68300	58669

On the basis of the above data, it has been seen that the total actual sale of the July was less than as a budgeted sale. However; the actual revenue from the Beverage was more than the budgeted revenue, due to the actual sale of the food and function was less than the budgeted therefore the overall revenue in the month of July was less than budgeted revenue. Further, the actual food cost, Beverages cost, marketing cost, Utilities, expenses were more than the expenses stated in the budget. However expenses in case of the telephone, miscellaneous and wages were less than the budgeted expenses.

Table 5: Computation of the variances for the month of July

Particulars	July (Budgeted)	July(Actual)	Variance $	Variance %
Food Sale	80000	78610	-1390	-1.7375
Beverage sale	60000	61440	1440	2.4
Function Sale	100000	97500	-2500	-2.5
Total sale	240000	237550	-2450	-1.02083
Food cost	45000	47623	-2623	-5.82889
Beverages cost	20000	24982	-4982	-24.91
Marketing	1200	1300	-100	-8.33333
Rent	18000	18000	0	0
Telephone	500	440	60	12
Miscellaneous	1500	1399	101	6.733333
Utilities	3000	3561	-561	-18.7
Wages-Basic Salary	75000	74160	840	1.12
Superannuation	7500	7416	84	1.12
Total Operating Expenses	171700	178881	-7181	-4.18229
Net Profit/Loss	68300	58669	-9631

The negative sign shows the adverse variance of the company. The actual sale of the food and function was less than the budgeted sale of the variance. The adverse variance in case of the revenue depicts that the company did not achieve its performance (Bromiley, & et al. 2015 . The manager of the company by evaluating the sales strategy related to the food and function element has to identify the problem and take the proper decision. However the actual beverage sale of the company was more than the budgeted, this shows that the sales strategy with regards to the beverages was effectively able to achieve its target. The overall sales variance of the company was negative; the company should improve its performance by taking the proper decision.

Analysis of Variance for July

In the case of the expenses variance if the actual expenses of the company were more than the budgeted expenses determined by the company than it will be regarded as the adverse variance for the company. Adverse variance are not good for the company; the company has to find the reasons behind the adverse variances (Uyar and Kuzey, 2016). The telephone, labour cost and miscellaneous expenses variance were the favourable for the company. The reason for the negative marketing variance may be the high promotional cost, advertisement expenses, publicity expenses etc. for enhancing the sale of the company.

A company by analyzing the operating activities can identify the actual reason for the increased expenses. The utility expenses variance was the significant adverse variance as compared to the all adverse variance (Nishimura, 2019). The company should comprehensively evaluate the expenses with this regards. Further, the beverage cost variance also impacts the company in a negative aspect for the costly purchase by the company. The company should discuss with the supplier for the best price or any discount on the purchase, along with company should also identify the new supplier so that the purchase cost can be minimized (Nuhu, Baird, and Appuhami, 2016)

Computation of the variance for the month of August and September

For August

Table 6: variance for the month of August

Particulars	August (Budgeted)	August(Actual)
Food Sale	75000	78563
Beverage sale	58000	58621
Function Sale	100000	98565
Total sale	233000	235749
Food cost	40000	44225
Beverages cost	18000	21656
Marketing	1200	1140
Rent	18000	18000
Telephone	500	411
Miscellaneous	1500	1120
Utilities	3000	3800
Wages-Basic Salary	75000	74822
Superannuation	7500	7482
Total Operating Expenses	164700	165174
Net Profit/Loss	68300	70575
% of revenue	29.31	29.94

For September

Table 7: variance for the month of September

Particulars	September (Budgeted)	September(Actual)	Variance $	Variance %
Food Sale	75000	73984	-1016	-1.35467
Beverage sale	58000	54996	-3004	-5.17931
Function Sale	80000	76536	-3464	-4.33
Total sale	213000	205516	-7484	-3.51362
Food cost	40000	39815	185	0.4625
Beverages cost	18000	16458	1542	8.566667
Marketing	1200	980	220	18.33333
Rent	18000	18000	0	0
Telephone	500	489	11	2.2
Miscellaneous	1500	1365	135	9
Utilities	3000	3715	-715	-23.8333
Wages-Basic Salary	72000	72984	-984	-1.36667
Superannuation	7200	7298	-98	-1.36111
Total Operating Expenses	161400	161104	296	0.183395
Net Profit/Loss	51600	44412	-7188

From the above-calculated variances, it has been seen that in the month of the August, the major issues associated with the sales variance resolved. Since the actual food sale and the beverage sale was more than the budgeted and also the percentage of the variance in case of the function sale was reduced. Overall the company was obtained the actual sales more than the budgeted sale in the month of August. However, in the month of September, the actual sales were less than the budget even in all respect.

In the case of the expenses related to the food cost and the beverage cost, the company improved its performance to a great extent. Although in the month of August food and beverage cost ratio was negative, but it was less than with the month of July and in September the company purchase at less than its budgeted cost. However, the utility variance was increased significantly in August and then reduced in September. Further, the labour variance arises in the September, due to the company set the budgeted labour cost was less than as compared with the month of July and August. Moreover, the performance of the August was best for the company; the company achieved its profit more than budgeted profit.

Future changes 

In the coming month, it may be possible that the company through its strategy also enhance its revenue. After the reduced performance of the September Company would evaluate the reason and analyze the strategy of the August because in the month of August the company obtain the best result. A company by minutely observing the reasons for the difference between the August and September can implement the best policies so that the variance would be reduced to the significant level (Savina, and Kuzmina-Merlino, 2015).

Importance of observing the Budget

By monitoring the budget, the company can identify the need of the finance and also assist in planning for raising the finance. Moreover through the budget company can evaluate the revenue and cost of the product along with taking the idea of the future performance of the company (Rogulenko & et al. 2016). Moreover, the company also identify the variance by considering the budget as a base and find the reasons for the difference between the budget figure and the actual figure. By identifying the requirement for the expenditure related to the product, the company can manage the finance in a better way (Klychova, Faskhutdinova, and Sadrieva, 2014).

References

Bromiley, P., McShane, M., Nair, A. and Rustambekov, E., 2015. Enterprise risk management: Review, critique, and research directions. Long range planning, 48(4), pp.265-276.

Hope, J., 2015. Collaborate, communicate for an effective budgeting process. Dean and Provost, 16(8), pp.1-5.

Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.

Morgan, D., Robinson, K.S., Strachota, D. and Hough, J.A., 2017. The Multiple Purposes of Public Budgeting. In Budgeting for Local Governments and Communities (pp. 99-110). Routledge.

Nishimura, A., 2019. Uncertainty and Management Accounting: Opportunity, Profit Opportunity, and Profit. In Management, Uncertainty, and Accounting (pp. 73-95). Palgrave Macmillan, Singapore.

Nuhu, N.A., Baird, K. and Appuhami, R., 2016. The association between the use of management accounting practices with organizational change and organizational performance. In Advances in Management Accounting (pp. 67-98). Emerald Group Publishing Limited.

Rogulenko, T., Ponomareva, S., Bodiaco, A., Mironenko, V. and Zelenov, V., 2016. Budgeting-Based Organization of Internal Control. International Journal of Environmental and Science Education, 11(11), pp.4104-4117.

Savina, S. and Kuzmina-Merlino, I., 2015. Improving Financial Management System for Multi-business Companies. Procedia-Social and Behavioral Sciences, 210, pp.136-145.

Uyar, A. and Kuzey, C., 2016. Does management accounting mediate the relationship between cost system design and performance?. Advances in accounting, 35, pp.170-176.