Importance of Budgets for Twin Rivers Café

This study summarises core objects of framing budget in context of company Twin Rivers Café with aim to enhance overall performance of company. A comprehensive report of variances between planned and actual figures of sales, expenses and profit of respective company is also summarised in study. Further study contains considerable activity of variance and advise or recommendations to company for minimisation of these variances.

Finance

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
TASK...............................................................................................................................................3
A. Objective of preparing a budget for Twin Rivers Café:.........................................................3
B. Report showing the company’s revenue and spending variance for July along with
explanation:.................................................................................................................................4
C. Activity of variance should be of concern to management:...................................................5
D. Advise and Suggestions to Twin Rivers Cafe:.......................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

EXECUTIVE SUMMARY
This study summarises core objects of framing budget in context of company Twin
Rivers Café with aim to enhance overall performance of company. A comprehensive report of
variances between planned and actual figures of sales, expenses and profit of respective company
is also summarised in study. Further study contains considerable activity of variance and advise
or recommendations to company for minimisation of these variances.
TASK
A. Objective of preparing a budget for Twin Rivers Café:
Budgets are projections of overall sales/revenue and different costs incurred during
specific coming time-period and is normally composed and evaluated periodically. A budget act
as internal mechanism applied by managing personnels 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 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 plan and actual costs.
The greater the variances, 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 strategical 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).
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 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 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,
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 manager
allows itself to become extremely optimistic in incorporating assumptions into design of budget.
Tool for decision making: The aim of budget is to provide a fiscal structure for decision-
making processes. It help to ensure that all decisions taken by company are as per the targets
determined in budget. Management by analysing budgets and any variance can take 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 enable
corporation to track the overall business performance as on a particular date.
Forecast of income and expenditure: This is core purpose of a budget to predict business's
income, receipts and expenditures reliably and accurately. Company by framing 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
explanation:
Planning And Actual Budgets For The Month Ended July 31, 2018
Planning Actual Variance
Budgeted meals quantity(Qty.) 18000 17800 200
Revenue £ 81000 £ 80100 £ 900 A
Expenses:
Raw material (£ 2.40q) £ 43200 £ 42720 £ 480 F

Wages and salaries (£ 5 200+£ 0.30 q) £ 10600 £ 10540 £ 60 F
Utilities (£ 2 400 + £ 0.05 q) £ 3300 £ 3290 £ 10 F
Facility rent (£ 4 300) £ 4300 £ 5100 £ 800 A
Insurance (£ 2300) £ 2300 £ 2600 £ 300 A
Fuel £ 2480 £ 2490 £ 10 A
Net Operating Income £ 14820 £ 13360 £ 1460 A
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 above study it has been articulated that budgets are significant aspect of 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.

REFERENCES
Books and Journals:
Finance, E.H. & Network, C., (2013). The eurosystem household finance and consumption
survey-results from the first wave (No. 2). ECB statistics paper.
Makings, U., & et.al., (2014). Importance of budgets for estimating the input of groundwater-
derived nutrients to an eutrophic tidal river and estuary. Estuarine, Coastal and Shelf
Science. 143. pp. 65-76.
Senthilkumar, K., Nesme, T., Mollier, A. & Pellerin, S., (2012). Regional-scale phosphorus
flows and budgets within France: the importance of agricultural production
systems. Nutrient Cycling in Agroecosystems. 92(2). pp. 145-159.
Gago-Rodríguez, S. & Purdy, D.E., (2015). The effects of budgetary knowledge and extrinsic
motivation on the importance that managers attribute to their budgets. Spanish Journal
of Finance and Accounting/Revista Espanola de Financiacion y Contabilidad, 44(1),
pp. 47-71.
Vance, D., & et.al, (2016). The oceanic budgets of nickel and zinc isotopes: the importance of
sulfidic environments as illustrated by the Black Sea. Philosophical Transactions of the
Royal Society A: Mathematical, Physical and Engineering Sciences. 374(2081). p.
20150294.
Lidia, T.G., (2015). An analysis of the existence of a link between budgets and performance in
economic entities. Procedia Economics and Finance. 32. pp. 1794-1803.