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P6 Illustrate the Use of Budgets as a Means of Exercising Financial Control of a Selected Company.

In: Business and Management

Submitted By Plant17
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Dear Adam and Josh,

As you have said you are facing trouble with making a profit in the small business of Riverside then I will look at your accounts and see where they can be improved. Also just to say thank you for coming to me with your issues.
A budget is an estimate of expenditure for a set period of time. Small businesses like yourself prepare budgets for many reasons, firstly the reason being budgets set targets so then the business can successfully save some of the profit they generate and then can save up for stuff in the short term and long term. This is a very good idea and way of budgeting as if you save up the profit from Riverside then if the business does go into any debts then it can be paid off through this method. Also if either of you two have new ideas that need funding heavily then saving up again, for example out of the budget you can just take one or two hundred pounds out a month that won’t take a massive percentage of the profit out of the business but will add up and be a good savings amount if things go wrong. As on the balance sheet I can see that you are not making profit, so for this moment in time this will not be available so it shall happen when the business starts generating profit again. Another reason why the budget is so important is that with the priorities set out (Priorities set from the balance sheet.) Then everyone in the business knows what the aims and priorities are of the business. As the business isn’t making any money you two need to be able to be in full control of the spending inside and out of the business so nothing gets wasted with spending the wrong amounts or buying too much stock. Another good reason, as there are two owners in the business then budgeting can allow the money to be spent fully on re investing in the business and not one of you two taking money from the business and also gets rid of peoples hidden agendas with in the business. The last major reason is that with the budgeting properly the business can start to make a reasonable profit margin. This can then be put back into the business and ensures the future success of the business. Budgets are so important for a small business like Riverside as they fully analyse what is being spent and what its being spent on, also so you can carefully analyse what needs to be spent on anything and how much exactly it costs, this is very good for the business as if any money is being unnecessarily taken out of the business then either one of you can see that and take note. Another reason is that as a small business does not have much money and they do not want to be wasting it on expenditures that they do not need, this will also save them a lot of money. Budgets are so important for small businesses such as Riverside because as no small businesses have a lot of money to waste this means that you can’t afford to waste any money. Also, with keeping a budget and setting out costs etc then you can see how many items per day/week/month that you need to sell. This will indicate clearly the goals that you two and the rest of the employees need to try and achieve. This point is for every business but even more for a small business, the main reason for any business setting up a budget is to make sure the business makes profit and to obviously maintain the cash flow. The main problem with the businesses budget is the amount of stock being brought. The amount of stock that was actually brought compared to the predicted budget, this alongside the lack of sales is resulting in costing Riverside a lot of money. The way you can resolve this is to do a different technique of buying the products, for example you two can only buy when needed. This will reduce waste of the ingredients and the waste of money. Remedies that I can suggest to be able to budget properly and start making a profit for you two are firstly to go and find another cheaper supplier, and as stated above to do the just in time method, the method is that you only buy stock when you need it, instead of ordering a big bulk load at one time. This will decrease the amount of money wasted on stock each month. If either of you do not feel comfortable with the idea of this then I do still suggest going to a cheaper supplier as the stock is far too expensive, I am not sure if this is due to you two ordering too many products or that you are over paying big time on products. Moving on to the rent, this cannot be changed until your contract is up with the landlord. (Otherwise the owner could end up suing you.) I believe after your contract is up then you need to look for a cheaper premises, this will save you a lot of money and could even help expand the business if it is a better property; even though this isn’t a major concern. (If you believe the property is good enough and don’t mind paying a bit over the odds if it’s in a good location.) But if possible and the location and property are good then I believe moving would benefit the business. If you decide to move then it could cost more though due to the re advertising of where the new store is, so possibly not the best idea. The wages again are a concern, the way this could be resolved are through making a few members of staff redundant and possibly replacing all full time staff and getting in part time workers and then both of you contributing in. Or there is a way that would take a few weeks/months to work out but if you do reports on what time of the day most of the customers come in and also what days/ seasons are most popular then you can give the staff the time then. For example, if you are most popular between 12-2 on a Monday then you would need to put on the rota that you need more than two people to look after the cafe on the other hand if for example the least busiest days are Monday at 6-10 then you would only need one member off staff. There is a very good way as well, and that’s if both of you contribute to the work load. This can mean that you can make a few people redundant and then be able to take over their jobs. And again with you two contributing, you can make the admin team redundant and learn to do the admin yourselves; this will reduce the costs completely. Again with the insurance, just like the rent, the insurance can be slashed by a lot by finding a cheaper company to have the insurance with. The interests on the loans are a big factor as you would have taken them out when you first started off. My only real solution to this is to ask the bank if you can change the way and how much you pay each month, as the loan is costing a lot more expected I personally believe you should ask to pay around two hundred a month until it is all paid off, this will cost less each month but last a lot longer. Lastly, with the bank charges. I believe that if the customer wants to pay by card then you two needs to think of a charge that they need to pay to cover the costs off the bank charges, or to use cash only. This will reduce the costs a lot and save a lot of money. The different variances are adverse and favourable. Favourable variances are variances that greater than predicted. An adverse variance is when the result is worse than predicted. The main budget variance is a periodic measure used by governments, corporations or individuals to quantify the difference between budgeted and actual figures for a particular accounting category. The favourable variance are higher than expected so these on the budget are the stock, wages, administration, insurance, interests and loans, bank charges and repairs and maintenance. The reasons behind the stock being so expensive is due to the fact that you did not find a cheap supplier another reason could be due to the fact that you are buying a lot more than you need. If this continues into next month then you will find yourself with a lot more stock than needed and will have no where to put it, and also losing a lot more money still. This can be prevented with you finding new suppliers and doing a just in time production after all the products have gone. Next, the wages, the reason that this is so high is due to the fact that possibly you two aren’t contributing to the work load, or due to the fact that there is a lot more staff than necessarily, these can easily be prevented by making people redundant and working out times for both of you to contribute and work as well to save money. If this goes on to next month then the employees are going to still be expected to be paid, this will again take a lot of money from the budget and if the company can’t afford to pay It then the employees can take you two to court. Again, just like the two previous points, with the admin team, it can easily be resolved, you two need to learn how to do your own admin and possibly train a few more members off staff to be able to do it to, the reason is that the admin team isn’t needed and is a waste of money. If this continues to happen next month then the business will lose a lot of money and the admin team can take the company to court if they aren’t going to be paid. With the insurance, this needs to be carried out just in case anything happens to the company or any of the products. This can easily be prevented by finding a new company to insure the company; also the price can be lowered if the payout sum is lower as well. Moving onto interests and loans, the loans can be lowered to around £150-200 pound a month, at the moment the price is £700 a month and that is far too high, even more so that you aren’t making any profit. This can be prevented by asking the bank to change the monthly sum down to a lot lower price. If this continues then the business will need to take out a loan to pay off the original loan, this will then end up costing the business more. If this continues the business will go into so much debt that it will need to be sold off. The bank charges are a lot higher than expected, these can be changed by changing the way the customers pay, or if they do need to pay with card then you two should set a price for paying for the service, for example, the minimum amount of money they can spend is £10 and anything less they have to pay by cash, and if it is less than £10 they will have to pay a £2 fee for it. If this continues into next month then a large percentage of the sales will be for nothing as the charge is too expensive. Lastly, the repairs and maintenance. The repairs and maintenance aren’t much more than expected and there is nothing that anyone can really do to prevent them. I personally believe that if you two save up profits then every time a product gets broken then either of you will be able to pay it and it won’t take anything from the budget. If this continues into next month and a lot of things break then Riverside Coffee bar will have nothing to use and won’t make any sales. A way to prevent this is to buy the highest quality products by saving up for them.
The adverse variances are the advertising, salaries, and telephone bills. These are good things as they are cheaper than expected so you two are saving more money.…...

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