Financial Analysis and Planning : Assignment

Financial Analysis and
Planning

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A) Prepare production budget and to revise schedule in order to reduce overtime working. 1
TASK 2............................................................................................................................................3
A) Analysing variances and giving summary on problems identified in preparation of budget 3
TASK 3............................................................................................................................................5
A) Calculation of break-even point .......................................................................................5
B) Constructing break-even chart from the data gathered......................................................5
TASK 4............................................................................................................................................6
A) Producing Cash Budget for six months of Wilkinson Ltd................................................6
B) Projected variances............................................................................................................6
C) Analyse results of cash budget..........................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Financial planning and analysis play a crucial role in the company as operational tasks
are to be achieved within stipulated time. Present report deals with various scenarios focusing on
core aspects of finance and importance of concepts in the business. Production and sales budget
both have been prepared which shows units to be manufactured to effectively meet expected
demand of customers in the best possible manner. Furthermore, flexed budget is formulated and
matched with actual figures to find out variances if any. Break-even analysis is conducted which
provides clarity to the organisation as to how many sales are to be achieved to attain profits.
Furthermore, problems associated while preparing budget are discussed. On the other hand, cash
budget is prepared on projected basis for the period of six months. Thus, financial planning and
analysis is much relevant to analyse performance and take decisions accordingly.
TASK 1
A) Preparing production budget and revising schedule in order to reduce overtime working
Sales Budget for Home Gym Ltd
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
Sales units 150 150 200 400 400 400 500 300 200 200 700 425
Price per
unit 2.7 3 3.65 3.7 3.8 4 4.1 4.2 4.4 4.8 5 5.1
Total sales 405 450 730 1480 1520 1600 2050 1260 880 960 3500 2167.5
Production Budget for Home Gym Ltd
Production
budget Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
Forecasted
sales (units) 150 150 200 400 400 400 500 300 200 200 700 425
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Add: Closing
stock 275 450 600 550 500 450 300 175 325 475 125 100
Total
Production
required (units) 425 600 800 950 900 850 800 475 525 675 825 525
Less: Opening
stock 100 275 450 600 550 500 450 300 175 325 475 125
Units required
to be
manufactured 325 325 350 350 350 350 350 175 350 350 350 400
Cost per unit 3.25 1.18 0.78 0.58 0.64 0.70 0.78 0.58 2 1.08 0.74 3.2
Production cost
1056.2
5
384.0
9 272.22 204.17
222.7
3 245 272.22 102.08 700 376.92 257.89 1280
The production budget is quite useful in analysing how products can be manufactured in
the best possible cost so that more units can be manufactured with much ease. This budget lists
down a schedule in which budgeted production units must be generated by the manufacturing
unit of organisation leading in order to achieve expected sales in the best possible manner.
Moreover, production budget also provide clarity to the organisation how much units are to be
produced for a specific time frame so that planned inventory related to finished goods and
expected demand of sales can be met by the firm in effective way. Thus, production budget is
prepared as per the proposed proforma. Another essence of production budget is that it is
formulated just after sales budget is prepared. This is evident from the fact that expected sales
units to be achieved in anticipation of demand of the customers in the best possible manner
(Dang, Li and Yang, 2018).
Sales budget provides expected units of sales and multiplied by price per unit of the
product in effectual manner. It shows total sales needed to be accomplished by organisation. This
kind of budget influences several elements of master budget which is an aggregation of all the
budgets. It is evident from the fact that total figure of sales imparted by sales budget forms the
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base of elements of budgets in the best possible way. This includes customer receipts, proforma
of income statement etc. Thus, estimation of sales required in units can be calculated in effectual
manner. On the other hand, after sales are analysed and estimated, production budget can be
made by estimated sales figures in units to be attained and production of stated units are achieved
in effectual way. This budget is prepared in anticipation so that demand can be met with much
ease. This is evident from the fact that without sales prediction, entity cannot manufacture
products and as a result, demand and needs of customers cannot be accomplished by
organisation. Thus, it is required to prepare both the budgets for assessing demand in effectual
manner.
It can be analysed that production and sales budget is prepared for Home Gym Ltd for the
period of 12 months starting from January to December. By arriving at constraints such as
closing stock should not fall below 100 units and another was warehouse cannot hold more than
350 units of production, budget is prepared.
Production budget Dec
Forecasted sales (units) 375
Add: Closing stock 100
Total Production required (units) 475
Less: Opening stock 125
Units required to be manufactured 350
It can be interpreted that organisation should produce above calculated amount of budget
and as such, first constraint of closing stock should not fall below 100 is taken. Moreover,
second constraint relating to warehouse cannot take more than 350 units is also used and
variation can be analysed. Moreover, it can be said that units to be manufactured in the month of
December exceeds the second constraint (García, 2017). Thus, in order to reduce overtime
payment of workers, forecasted sales units should be deducted by 50 units. By revising sales
units, second constraint can be effectively met as subtracting 50 from 425, total units attained is
375. Hence, total units to be manufactured come to 350 which are within all the constraints. It is
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suggested to Jim that in order to avoid overtime working, forecasted sales units should be revised
so that constraints can be met with much ease.
TASK 2
A) Analysing variances and giving summary on problems identified in preparation of budget
Flexed Actual
Variance
Favourable(F) Or
Actual ( A )
Volume Sold 30000 33000 3000 U
£0.00 £0.00 £0.00
Sales Revenue 1080 1950 -870 U
Less: Costs
Direct
Materials 330 610 -280 U
Direct Labour 204 365 -161 U
Overheads 650 710 -60 U
Operating
Profit 75 265 -190 U
The budget is prepared which is a financial goal to be achieved by the company so that
actual output may be attained as compared to budgeted results in the best possible manner. This
is required so that variances if any can be analysed and improvement may be made in effective
way. This can be attained by taking corrective action so that such variances can be removed up to
a high extent and firm may be able to perform well in effective manner. Such analysing of
deviations from the budgeted and actual output is termed as variance analysis (Hansen, 2018). It
can be analysed from the above flexed budget that deviations observed in the calculation of
variances between actual and flexed one. The basic criteria for making analysis whether variance
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exists or not is regarding all the costs, if there is excess of amount of flexed budget than actual
one, favourable variance is achieved. On the other hand, if there is excess of actual figures than
flexed budget, then there is unfavourable variance. Thus, it can be analysed that flexed budget
figures are less than actual figures and as such, there are unfavourable variances in the budget
formulated.
The problems occurred while preparing budgets are inaccuracy, requirement of time, no
flexible decision making etc. In relation to this, inaccuracy is a foremost problem occurred as
budget is formulated on an mere estimation with regards to future which leads to improper
assumptions. Moreover, if market conditions changed and fixed budget is prepared without
taking into consideration because of its rigidity, results are not worthwhile. On the other hand,
next problem associated with budget preparation is that lot of time is consumed and it is not good
for small company where fewer tasks are required to be attained and as such, budget is time-
consuming one. The decision is made by the top management without taking advices or
participating employees to share suggestions and as such, proper allocation of funds are not
made. This increases problem as proper allocation of resources cannot be made and as such,
company faces difficulty while preparing budget (Lombardi and Ravazzolo, 2016). Furthermore,
if more of the resources is allocated to departments without scrutinising their needs, budget
inflation may take place which is another issue while preparing the budget of company.
TASK 3
A) Calculation of break-even point
Selling price (P) = 20
Variable costs (V) = 10
Fixed costs (FC) = 5000
By applying the formula of BEP in sales (units)
= FC / P – V
= 5000 / 20 – 10
= 5000 / 10
= 500
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Now, BEP in sales can be calculated by = Price per units * BEP in sales (units)
= 20 * 500
= 10,000
B) Constructing break-even chart from the data gathered
The break-even chart has been drawn with respect to BEP sales in units by taking into
selling price per unit of 20, variable cost per unit of 10, fixed costs for the month is 5000 (Break-
even Point Equation Method. 2018). Thus, BEP in units carried out is 500 and in sales is 10,000.
This means that company has to achieve sales of at least 10,000 at which total costs is equal to
revenue. It is required because falling less than this amount, losses may be started occurring.
Thus, it is needed that toys manufacturer should produce 500 sales units so that profit may be
achieved. Break-even point is a situation where firm is having no profit no loss. However,
beyond this point, company suffers loss as total costs exceeds total revenue.
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Illustration 1: BEP chart

TASK 4
A) Producing Cash Budget for six months of Wilkinson Ltd
B) Projected variances
C) Analyse results of cash budget
Particulars Jan Feb Mar April May June
Sales 57500 65000 70000 72500 85000 65000
Total
receipts 57500 65000 70000 72500 85000 65000
Purchases 26500 25000 30000 50000 35500 28500
Wages and
salaries 17500 18000 18250 18500 16500 20000
Other
expenses 15500 20500 19000 18500 20500 22000
Total
payments 59500 63500 67250 87000 72500 70500
Total -2000 1500 2750 -14500 12500 -5500
Less:
Opening
stock 15500
Add:
Closing
stock 17350
Surplus /
deficit -17500 1500 2750 -14500 12500 11850
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Opening
cash balance 2250 -19750 21250 -18500 4000 8500
Closing cash
balance
-19750 21250 -18500 4000 8500 3350
It can be analysed that projected cash budget is prepared which provides clarity about
cash position of the firm by deducting expenses from the receipts. The projected budget sets out
that opening balance of cash in the month of January was 2250 which is been taken into account.
On the other hand, opening stock of January and closing stock is taken and assessed in the cash
budget (Montford and Goldsmith, 2016.). The variances of cash can be analysed in all the
months such as closing cash balance in starting month is -19750, in next month is 21250, while
in month of March is -18500, in April is 4000. On the other hand, closing cash balance in May is
8500 and in June is 3350. Thus, it can be analysed that there are variances in balances. Thus, six
months of cash budget is prepared for the firm in effective manner.
CONCLUSION
Hereby it can be concluded that financial planning and analysis is quite effective to
company as performance may be easily assessed and adequate decision can be taken for the
future with much ease. Furthermore, budgeting help to analyse company how actual output can
be attained as listed in the budgeted one. Variances or deviations if any can be removed up to a
high extent by taking corrective actions in the best possible manner. Moreover, company may be
able to achieve budgeted goal as anticipated and as such, actual results may be accomplished.
Break-even point analysis is another useful for the company so that at least company can easily
analyse how it has to accomplish break-even sales so that profits can be garnered.
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REFERENCES
Books and Journals
Dang, C., Li, Z. F. and Yang, C., 2018. Measuring firm size in empirical corporate
finance. Journal of Banking & Finance. 86. pp.159-176.
García, F. J. P., 2017. The WACC. In Financial Risk Management (pp. 345-351). Palgrave
Macmillan, Cham.
Hansen, C. B., 2018. Peter Birch Sørensen University of Copenhagen:" Taxation and the optimal
constraint on corporate debt finance: Why a comprehensive business income tax is
suboptimal". Virtual Reality.
Lombardi, M. J. and Ravazzolo, F., 2016. On the correlation between commodity and equity
returns: implications for portfolio allocation. Journal of Commodity Markets. 2(1). pp.45-
57.
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