Budgeting And Financial Analysis For On The Beach Manufactures

Overview of the expected results of 2019

In order to manage a production facility smoothly, it is important the management plans and budgets the requirements beforehand. We have been presented with the projected data of “On the beach” manufactures. Using this data we have calculated various budgets of the company. Budgeting is a very important part of financial planning (Adelaja, 2015). Budgeting helps the management lay down a path which helps them to achieve the goals. It is a complex process which requires collection of data and then application of such data in order to retrieve information (Atkinson, 2012). In our discussion below we have discussed about the projected results of “On the Beach”. 

We have used the projected data of the company related to its various segments in order to calculate the expected results for the upcoming year. To start with the planning, the management has first estimated the units which are expected to be sold, for various products over the year2019.  

Taking this as the base requirement all the functions like purchase, distribution, production etc are to be planned. Using these production units the purchase of materials and availability of labour will be planned.

The management has planned to maintain the inventory level at 50% of the requirement of the next month, using which we have calculated the production which is required to take place. 

Taking this data we have planned on planned on purchase of materials and availability of labour and machine hours. It is important to allocate the resources so that maximum returns with the existing resources can be achieved.

The management has also estimated manufacturing cost and other operating cost in order to determine to total cost of production. Taking all the revenue and cost data compiles by the management we have arrived at an estimated profit levels of the company. The expected profits of the company are expected to be as follows:

Therefore, form the data collected by the management, it is expected that the company will generate profits of approximately 0$.4 million in the year 2019.

The company in engaged in manufacture of four products- one piece, board shorts, towels and beach bags. One piece is the product that is the major attraction for customers. In order to evaluate the profitability of all of the products we have calculated contribution for each of them individually.

Contribution is the amount net of sales and variable cost. The contribution per unit is divided by total fixed cost in order to arrive at breakeven point. Breakeven point is the point at which the company has no profits or loss; at this level all the revenues are equal to cost (Berry, 2009).

Analysis of contribution margin of the products

The following table shows calculation of contribution for each of the products:

Therefore, from the above we can see that the product that provides highest contribution is one piece swimsuits. The company should keep focussing on the production of its main product. The contribution earned by board shorts and towels are sufficient and positive, hence they are expected to be profitable for the company. The contribution earned form beach bags are negative. This indicates that the cost of production of beach bag is more than the sales price. Production of beach bags will result in losses for the company. The management should either stop the production of beach bags or increase its sales price so that it does have to incur losses.

Therefore, we see that contribution calculation helps us analyse the profitability at product level. This can help us improve cost and also assist management in pricing policy (Bierman & Smidt, 2010). 

Cash is a very important part of a business. It is important that the business keeps and maintains its level of liquidity in order to ensure smooth running of the functions. Lack of liquidity may result in cash crunch for the company which might affect the operations. Affect on the operations of the business will harm the productivity which will then harm the profitability of the business (Datar M. S., 2015). Therefore, it is important that the management plans its cash position before hand in order to avoid situations of cash crunch.

While making the budget the management plans for a cash cycle. Cash cycle refers to the period in which we can expect to collect the dues form the debtors and pay the dues to creditors (Boyd, 2013). Taking this cash cycle, the management prepares for cash budget, which helps the management check for availability of cash so that dues can be met. Following is the expected cash balances of the company expected for 2019:

The payments and balances expected for the year 2019. We see that the cash balance of the company increases towards year end. This is due to rise in accumulated profits. The business witnesses decline in the cash receipts and payment initially and then at the end recovers.

The company is expected to have proper level of cash at each month end. It is unlikely that the business will face situation of cash crunch. In case of excess availability of cash, it is important that some cash is withdrawn. The company loses interest on the idle cash. The spare cash left with the management can be utilised to increase the value of the business (Datar S. , 2016).  

Analysis of the cash position of the business

The basis of projection on which the budgets are made, need to be based on actual facts and market study (Dayananda, Irons, Harrison, Herbohn, & Rowland, 2008). The management is required to study the demand for the product which is likely to happen in the upcoming years. This is the matter of thorough market study and customer research. We have used the data collected by IBIS world in order to project the sales information for 2020 (IBIS World). The forecast shows growth of 0.8% in the business related to retail industry. We have used this rate to calculate the estimated sales for “On the Beach” for the year 2020:

Therefore the above table shows the expected growth of 0.8% in the business of retail industry for the upcoming year. IBIS world also estimates that the increase in revenue for the retail industry is expected to be by 1.2%. Using this data we have projected the sales price of the units of various products:

Therefore taking the data collected by the IBIS world, we see that the revenue for the retail industry is likely to increase by 1.2%. The projections made by management should be based on such statistics which are calculated using sufficient evidence and study (Holtzman, 2013). The management can make budgets based on this information. 

Conclusion

From the above analysis we can see that management has made use of various budgetary tools in order to pre-prepare a path for the working for the next year. The management should take proper care while implementation of such plans (Shapiro, 2007). They should also incorporate any variances which are likely to affect the business returns. Overall the profitability of the business for the next year seems fine. Now it is important that execution of the budgetary plan is conducted smoothly in order to maximise the returns. 

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