Maree’s Business: Goals, Risks, And Budgeting

Revenue Details

Maree will earn a profit first in the month of June.

Maree will reach the point of break even in the month of September.

At the end of the first full year, Maree has increased her average prices by $5 from $50 to $55.

Maree needs to be mindful of the fact that if the business makes use of BAS for reporting and paying GST which it has collected and for claiming credits, supporting records needs to be maintained. Records must pertain to showing how income and expenses are used for calculating and supporting the amount reported and claims for credits. This consists of sales invoices, tax invoices, GST related transactions, expenses, fees, wages and any other business costs. Further, records are meant to be maintained for a period of five years commencing from when the records were prepared/obtained or when transactions are completed or other related acts whichever is later. Records must be maintained as long as to cover the review period of an assessment which makes use of information from the records (Ato.gov.au, 2022).

Three goals or key performance indicators which need to be set for Maree pertaining to sales, costs and expenses for maximizing her business income are listed as follows:

1. 10% Increase in Daily sales units.
2. 3% Decrease in ‘Other costs’.
3. 5% Decrease in Total Budgeted Expenses.

The proposed goals will help in sales maximization and exercising initiatives to cut down on costs, both of which will help in maximizing budgeted profits.

Assuming Maree’s business to be engaged in the professional services sector, some of the examples of the following types of risk which can adversely impact the financial key performance indicators of the business have been outlined as follows:

Operational Risks:

1. Employee health & safety amid Covid-19 pandemic
2. Inefficiency in business processes, controls and management.

Market Risks:

1. Interest rate risk & fluctuating rates of interest.
2. Economic Recessions and political turmoil.

Financial Risks:

1. Short term liquidity constraints.
2. A high gearing owing to an increased dependency upon debt capital which increases the financial leverage (Hopkin, 2018).

There are several different implications for Maree’s business in the likelihood of the above risks occurring. Loss of potential clients, a compromise on competitive advantage resulting in potential loss of market share and the going concern assumption or the long term foreseeable continuity of the business is at stake (Drury, 2018). A high exposure to financial leverage and insufficient liquidity will result in defaults which can be followed by filing for bankruptcy (Martin, Keown, & Titman, 2020).

Maree should adopt the bottom-up approach for developing the budget with her team. Further, the monitoring of budgets should occur from the management downwards with the process of monitoring to be reviewed regularly to ensure that they are working (Brewer, Garrison & Noreen, 2015).

Maree must not just evaluate business performance relative to targets but should also ensure identifying areas of improvement. These improvements should be consistent with the overall financial objectives and the requirements of the organization and the work team. Maree needs to find someone responsible for implementing such improvements which are agreed upon after maintaining open lines of communication with the help of meetings and agendas. These responsible people may include management, budgetholders and finance & support staff.

Sales performance has improved for the business owing to an increase in phone sales. However, the declining shop sales are a minor cause of concern.

BAS Record-keeping Requirements

The main reason as to why the business was not able to meet its budgeted after tax net profit is because of an exponential increase in expenses across all three cost categories and a decline in shop sales.

The accumulated budgeted net profit over the first three years of operations for the business is $47,131 (8291 + 16218 + 22622).

No, Giuseppe should not consider setting up a new shop at the end of third year considering the actual net profits of Year 1 and the budgeted net profits of Year 2 and Year 3. This is because the business witnessed a significant adverse variance when it comes to Year 1 results with respect to sales, expenses and profits. Further, it is highly possible that the other budgeted figures are quite optimistic and actual results may not fall in line with budgeted estimates. Instead, the business should focus more upon stability and implementing measures to rectify the variances in the forthcoming years.

The budgeted before tax profit for Year 3 is worth $31,420. The provided tax rate is of 28% and a tax value of $8,798 resulting in an after tax budgeted profit figure of $22,622. If the tax rate changes to 25%, the resultant tax figure will become $7,855 which will result in an increase in the after tax net profit by $943 (8798- 7855).

On the basis of the budget constructed above, it can be forecasted that the business will witness an increase in the dollar value of profitability which can mostly be credited to an increase in phone sales. However, rising expenses is also a cause of concern. Some potential recommendations for the financial viability of the business have been outlined as follows:

1. Focus and expand initiatives to increasing sales from shop sales which have declined.
2. Exercising cost control by cutting down on expenses. The use of zero based budgeting is advised.
3. Better inventory management and focus upon working capital management to minimize stock costs.
4. Redemption of bank loan so as to reduce interest liability which further helps increase profitability and also reduces financial leverage.

The ageing debtors report suggests that there are significant and material invoices which are still due way past the provided credit period to the customers. Harry’s Timber Yard has several invoices due well over 30, 60 and 90 days. Hence the changes of bad debts are quite high.

The total amount which is outstanding to Giuseppe is $830 (120 + 180 + 90 + 65 + 85 + 50 + 240).

(a) Current Month: There is no course of action required as invoices are not due until month end.

Over 30 Days: Gentle reminders to be given to customers so as to recover debts.

Over 60 Days: Communication, offering of discounts for payments, multiple payment options to be provided.

Over 90 Days: Make use of debt collection agencies and discontinuing credit services.

(b) Giuseppe should make a provision for bad debts for the amount owed by Harry’s Timber Yard.

Giving credit to customers for purchases should not be discontinued. This is because credit sales form a major proportion of total sales and helps provide incentive for customers to purchase. Further, efforts should be initiated to strengthen recoverability and increasing the efficiency of the accounts receivable team.

The trend with respect to average debtor days is that the ratio is expected to increase which adversely suggests a delay or an increase in time taken to collect debts from customers. This is also expected to hurt the operating cash flows of Giuseppe owing to a delay in cash replenishment. Further, the cash conversion cycle also gets adversely affected.

The internal stakeholders who need to be communicated with while preparing budgets are senior management, accounts department, budget committee, managers, and establishment staff. The external stakeholders include suppliers and financial advisories (Warren, Reeve & Duchac, 2016).

There are several interests which the stakeholders have in the budgets of a company. The internal stakeholders are concerned with financial stability, motivation & morale and ensuring the appropriate allocation of resources among different departments in a company. External stakeholders are concerned about their stakes invested while financial advisories can help solve financial dilemmas and hurdles.

The processes and resources which can be made use of for monitoring actual expenditure and controlling costs across the work team includes the reporting of assets, consumables, equipment, income, expenditure, stock and wastage. Further, costs and expenditure should be maintained on an agreed cyclical basis for identifying overruns and variations. 

References

Ato.gov.au. (2022). GST records. Retrieved 7 March 2022, from https://www.ato.gov.au/Business/Record-keeping-for-business/Detailed-business-record-keeping-requirements/Running-your-business—records/Business-activity-statement-records/GST-records/

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2015). Introduction to managerial accounting. McGraw-Hill Education.

Drury, C. (2018). Cost and management accounting. Cengage Learning.

Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Martin, J. D., Keown, A. J., & Titman, S. (2020). Financial management: principles and applications. Prentice Hall.

Warren, C. S., Reeve, J. M., & Duchac, J. (2016). Financial & managerial accounting. Cengage Learning.

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