Enhancing Twin Rivers Café Performance: Budget Analysis

TASK

A. Objective of preparing a budget for Twin Rivers Cafe:

Budgets are projections of overall sales/revenue and different costs incurred during the specific coming time period and is normally composed and evaluated periodically. A budget act as an internal mechanism applied by managing personnel at companies like Twin Rivers Café and is sometimes not needed for external parties such as stakeholders to disclose. Financial budgets are vital for full productivity operations. The budget is the principal means used by financial experts to control spending and budget differences (Finance and Network, 2013). When comparing the estimate with real numbers, analysts may detect any discrepancies between the plan and actual costs. The greater the variances, the more managing assistance is required. A budget, apart from allocating resources may also assist in setting targets, monitoring progress, and contingency plans preparation. This also enables company to hold responsible to particular executives to minimize variances in the budget. A thoroughly designed budget enables a company to keep track of where they are economically. This enables long-term strategic planning from present operating expenses to possible expansions. In this context following are some major objectives of preparation of budget, as discussed below:

Measure performance: A common aim of producing a budget is to utilize it as the basis for measuring the quality of workers, using budget deviations. This is a risky task, because workers are trying to change the budgets to make it easier to accomplish their individual goals (called budget slack).

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Predict cash flows: budget is valuable for fast-growing companies, with seasonal revenues, or with erratic patterns of sales. Such corporations have a hard time predicting how much money they are going to have in the near term, leading to frequent cash-related problems.

Provide structure: A budget is particularly beneficial to provide instructions to a corporation as to the route it is intended to go forward. It therefore sets the foundation on which to decide what to do next (Makings and et.al., 2014).

Allocate resources: Many businesses like Twin Rivers Café use a budgeting mechanism as a tool to determine where to assign funds for different activities, like acquisitions of fixed assets. Although a legitimate goal, this should be paired with an evaluation of capacity constraints to decide where assets should be assigned (Senthilkumar and et.al., 2012).

Model scenarios: If an organization has a range of possible directions it can move down, the company can develop a series of budgets to predict financial outcomes for each tactical route, each focused on various scenarios. this aim can lead to extremely unlikely outcomes if the manager allows himself to become extremely optimistic in incorporating assumptions into the design of the budget.

Tool for decision-making: The aim of budget is to provide a fiscal structure for decision-making processes. It helps to ensure that all decisions taken by the company are as per the targets determined in the budget. Management by analyzing budgets and any variance can make financial or operational decisions (Gago-Rodríguez and Purdy, 2015).

Monitoring business performance: Budgeting is intended to allow the current business results to be evaluated against business output prediction, i.e. business that meets expectations. It enables corporations to track the overall business performance as of a particular date.

Forecast of income and expenditure: This is the core purpose of a budget to predict a business's income, receipts, and expenditures reliably and accurately. Company by framing a budget determines the base for making estimation of incomes and expenses.

B. Report showing the company’s revenue and spending variance for July along with an explanation

Here in above report favourable variation for company are denoted by F while unfavourable or adverse variations are denoted by A. According to the above variance report it has been analysed that as compare to planned revenue units of 18000 company has actually sold 17800 units which lead to adverse variance of £ 900 in sales. While planned cost of RM is £43200 as compare to actual Cost of RM i.e. £42720 indicating favourable variance. Company's wages and salaries has reported a favourable variance of £ 60 and there is also a saving of £ 10 in utilities expenses as per budgeted. On other side, there are adverse variances of £ 800, £300 and £10 respectively in Facility rent, Insurance and Fuels. Company's overall net operating profit is also showing an adverse variance of £1460.

C. Activity of variance should be of concern to management

As per analysis of above variance report it has been founded that in Twin Rivers Café there several activity of variance which should be focused by management to achieve budgeted figures. Firstly Cafe is unable to attain the desired revenue, which leads to overall variance in organization's operating profits. There are three expenses which are increased as compare to planned figures even with decrease in sales volume. These expenses are Facility rent, Fuel and Insurance. In all such expenses there are major variances. Facility Rent is £800 greater than the expectations. While Insurance expenses are also higher than planned figure. Fuel expenses are also more than the budgeted level. Ignorance of these major major variance lead to decline in overall operational performance of business. Management should put their efforts in these activities to minimise variance gap. Also adverse variance in sales figures and quantity is notable concern as such variance indicates that company is not able to generate targeted revenue (Vance and et.al, 2016).

D. Advise and Suggestions to Twin Rivers Cafe

The finest way to maintain variances is monthly reports as well as periodic meetings with top management and unit heads to explore these inconsistencies. Twin Rivers Cafe is struggling with inadequate revenue as per predetermined targets. So firstly managers should focus in this area. Owner and management should also evaluate the planned or budgeted sales with to determine that whether planned revenue is as per the capabilities and efficiency of cafe. Company should develop budget according to the trends of tourists, visitors, flights and customer preferences as company is engaged in preparation of meals for tourists/citizens and company is located near a local airport. Planned revenue should be determined after considering possible impacts of these aspects on business of Cafe. Also any seasonal effect, inflation effect and other environmental impacts should be considered while determining budgeted sales.

Further in business, fixed expenses such as Facility rent and Insurance is also increasing with increase in sales which is a notable aspect. Here it is advisable to optimise these costs to minimise variance gap and operating profit. Organisation should classify their expenses as fixed and variable for better assessment and budgeting. Identification of factors which leads to increase in expenses is essential for business as to optimise such expenses. Company should recognise Insurance and Facility as fixed costs which are not changes with fluctuation in overall sales volume and figure. Further in order to minimise fuel expenses company should establish proper control and authorisation over payments made towards fuel expenses. Also company can segregate authorisation of fuel expenses with aim to develop effective internal checking system. Company should review its policies for internal cover by emphasising on minimisation of expenses (Lidia, 2015).

CONCLUSION

From the above study, it has been articulated that budgets are a significant aspect of a company which defines its performance and allocates factors which are detrimental in achievement of predetermined targets. Management should take different variances on priority to improve and sustain business performance. Also for taking different business decisions company can apply outcomes of budget to assess the viability of such decisions.

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