Budgetary Control and Financial Analysis: Howzit Pty Ltd Case Study

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MANAGE FINANCES
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Table of Contents
Task 1..............................................................................................................................................2
3):.....................................................................................................................................................2
(A) Development of Budget for company....................................................................................2
(B) Development of Budget Notes................................................................................................5
4. Prompt Questions......................................................................................................................6
1. Current Statuary requirement......................................................................................6
2. Current compliance requirement..................................................................................7
3. Review of financial software..........................................................................................7
4. Accounting Principals...............................................................................................................8
5. Implementation for preparing revising budget......................................................................9
6. Critical Dates and requirement for the company.................................................................10
7. Recommendations for company.............................................................................................10
8. Internal Control for company................................................................................................11
Task 2 Financial analysis of budget and actual performance.................................................12
2. Variance Report of Howzit Pvt Ltd.......................................................................................12
3. Cash Flow Analysis for the trend in debtors.........................................................................15
4 Examinations of various budgets on several issues...............................................................16
A. Issues........................................................................................................................................16
B. Variance...................................................................................................................................17
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C. Performance............................................................................................................................21
D. Recommendations...................................................................................................................23
E. Evaluation................................................................................................................................24
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Task 1
3):
(A) Development of Budget for company
Sales & Profit Budget
Particulars 2011/12 Qtr. 1 Qtr 2 Qtr 3 Qtr 4
Revenue
Sales 16971237 3394247 4073097 4412522 5091371
Less: Cost of Goods Sold 9503893 1900779 2280934 2471012 2851168
Gross Profit 7467344 1493469 1792163 1941510 2240203
Gross Profit % 44% 44% 44% 44% 44%
Less: Expenses
– Accounting Fees 10000 2500 2500 2500 2500
– Interest Expense 84508 21127 21127 21127 21127
– Bank Charges 5680 1420 1420 1420 1420
– Depreciation 179746 44936 44936 44937 44937
– Insurance 13390 3347 3347 3348 3348
– Store Supplies 3749 750 900 975 1125
– Advertising 350000 200000 50000 50000 50000
– Cleaning 16282 3256 3908 4233 4885
– Repairs & Maintenance 64272 16068 16068 16068 16068
– Rent 2640508 660127 660127 660127 660127
– Telephone [phone] 3899 4499
– Electricity Expense 26780 5356 6427 6963 8034
– Luxury Car Tax 32164 32164 0 0 0
– Fringe Benefits Tax 28000 7000 7000 7000 7000
– Superannuation 187020 37404 44885 48625 56106
– Wages & Salaries 2078000 415600 498720 540280 623400
– Payroll Tax 98705 19741 23689 25663 29612
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– Workers’
Compensation
41560 8312 9974 10806 12468
Total Expenses 5875361 1482107 1398627 1447971 1546655
Net Profit (Before Tax) 1591983 11361 393535 493538 693548
Income Tax 477595 3408 118061 148061 208064
Net Profit 1114388 7953 275475 345477 485484
Cash Flow Analysis - GST
Particula
r 2011/12 Qtr 1 Qtr 2 Qtr 3 Qtr 4
Sales
turnover
16,971,
237
3,394,2
47
4,073,0
97
4,412,5
22
5,091,3
71
Purchase
Turnover
9,503,
893
1,900,7
79
2,280,9
34
2,471,0
12
2,851,1
68
GST
Collected
1,697,
124
339,4
25
407,3
10
441,2
52
509,1
37
Less GST
Paid on
expenses
1,273,
248
288,3
81
302,7
82
321,9
12
360,1
75
– Cost of
Goods
sold
950,
389
190,0
78
228,0
93
247,1
01
285,1
17
–
Accountin
g Fees
1000 250 250 250 250
–
Insurance
1339 335 335 335 335
– Store
Supplies
375 75 90 97 112
–
Advertisin
g
35000 20000 5000 5000 5000
– Cleaning 1628 326 391 423 488
– Repairs
&
Maintenan
ce
6427 1607 1607 1607 1607
– Rent 264051 66013 66013 66013 66013
–
Telephone
1500 300 360 390 450
–
Electricity
2678 536 643 696 803
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Expense
– Vehicle
Expenses
8,
861
8,8
61 - - -
GST
Payable
423,
876
51,0
44
104,5
28
119,3
40
148,9
62
Aged Debtors Budgets
Particular 2011/12 Qtr 1 Qtr 2 Qtr 3 Qtr 4
Sales 16,97
1,237
3,39
4,247
4,07
3,097
4,41
2,522
5,09
1,371
% Debtors Sales 20% 20% 20% 20% 20%
Total Debtors 3394247 678849 814619 882504 1018274
Current 2851168 570234 684280 741304 855350
30 Days 339425 67885 81462 88250 101827
60 Days 169712 33942 40731 44125 50914
90 Days 33942 6788 8146 8825 10183
(B) Development of Budget Notes
1. There has been a continuous increase in the sales from year to year; however, the gross profit
percentage is maintained the same for all the years. Also, there is an increase in the expenses but
the proportion of the same is comparatively lower than that of sales which results in an increase
in the profit of the enterprise each year.
2. The effectiveness of financial management in the existing firm depends on :
a. Helping people to determine information needs.
b. Collection of right data by using different process and systems.
c. Converting data into information.
d. Presenting the information in the best possible way.
The company has been able to insert the above processes in the management to comply and
achieve the effect in financial management. Also, some other processes like benchmarking
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concept, sound capital budgeting decisions, Budgetary control, working capital management are
also to be adopted for the proper and effective functioning of financial management.
3. Assumptions & Relevant Notes for making Sales & Profit budget:
o Depreciation on the new car purchased has been calculated at the rate of 10% and divided among
all quarters equally. It has also been assumed that the car has been purchased at the beginning of
the year.
o Car purchased is assumed to be in the first quarter itself thus depreciation for the full year has
been charged on the same.
o It has been assumed that luxury tax (@ 33%) has been paid in the first quarter and purchase of a
vehicle is also in the first quarter.
o Cost of goods sold is inversely proportional to gross profit thus it has been assumed that the
remaining amount after deducting profit from sales is the cost of goods sold for the company.
o Cleaning expenses for the current year have been charged after deducting store supplies for
which a separate head is created by the enterprise.
o There has been an inflation of 4% from last year thus some expenses have been increased by 4%
in comparison to last year.
 Assumptions & Relevant Notes for making GST Cash Flow Budget:
o In the absence of relevant information cost of goods sold is assumed as purchased for GST
Calculations
o GST is included in the cost of the luxury car for a manager in the first quarter on 10 % for the
company.
o Cost of goods sold is calculated on gross profit margin by subtracting gross profit from sales
turnover for year and quarters
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4. Prompt Questions
1. Current Statuary requirement
Statutory Requirement for tax compliance for Howzit Pty Ltd under tax legislation is as follows:
 Tax Payment should be made by the company periodically and within a time period.
 Advance payment of tax to be made periodically as specified under taxation legislation
 Payment of tax amount can be made using online methods like a debit card or credit card. The
best way to pay tax is with BPAY or a credit or debit card.
 The company should get itself registered under GST if the annual turnover exceeds the threshold
limit specified.
 Tax payment should be made at the rate applicable to Australian companies after deducting
concessions or any other deductions applicable to the company.
 Tax payment should be made in instalments periodically as specified.
 The company must file the annual tax return within the prescribed time limit after the end of the
financial year.
 The company should also prepare reports like Business Activity Statements and income tax
return.
2. Current compliance requirement
There are certain compliances for the organization under the Corporations Act 2001. Some of
them are as follows:
 Financial Statements have been prepared in accordance with Chapter 2M of the Corporations Act
2001.
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 Financial statements have been submitted to ASIC within three months from the end of the
financial year.
 To prepare the directors report and conduct the audit of the financial statements prepared.
 Financial statements should include financial performance, financial position statement, cash
flow statement and schedule of depreciation.
 Director should keep proper care and due diligence about the operations of the company.
 Other compliances as required by the company according to the type of business carried on by
such company.
3. Review of financial software
Commercially available financial management software is:
MYOB- MYOB or Mind your own business is accounting or financial management software that
provides accounting services, tax services and other business services to small and medium
businesses. This system helps in managing the accounting transactions and payment of tax by
calculating the tax liability of the company (MYOB, 2019).
Quick Books-Quick book software is accounting software that makes payments, manage and pay
bills and conduct payroll functions of the enterprise. This software is also suitable for the small
and medium enterprise.
Sage 50 Cloud- This software is an online accounting solution to manage company financials
and compliance with taxation requirements. It helps in processes like cash flow, budgeting,
inventory management, taxation etc. It can also add on certain features relating to HR, data
management, e-Commerce etc (Sage, 2019).
Thus from the above analysis, it can be seen that Sage50 Cloud would be most favourable
software for the company as it has many additional features which might not be available in
other software's relating to financial management.
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4. Accounting Principals
Following budgeting principles can be applied in developing budgets required for this task:
Matching Principle-Matching principle states that the revenue of the company should be
matched with the associated cost of sales to reach the correct profit. It cost is not identified in
relation to revenue then the budgets prepared might not be of any use. Also, cost are matched
with revenue for a particular period like for a month or quarter or year thus making it easier for
making budgets for a particular period as both revenue and cost can be recognized using
matching principle. Thus it can be said that matching principle which is the basic principle of
accounting plays a major role in developing of budgets for the company by recognizing both
revenue and cost for the same period (Unegbu, 2014).
Account Groups- Segregation of the same type of accounts into a single group is known as
account group. Account group helps in analyzing areas which require more allocation on budgets
and also finding the cost allotted to a particular group and comparing the same with previous
allocations. Account groups help in preparation of budgets as segregation of costs becomes easy
as the group is formed for the similar accounts of the company.
Time Period- Time period is an important principle which is helpful in preparing budgets as
budgets are prepared on the basis of time allocation. Budgets should be prepared to keep the
following things in mind:
 The budget period should cover the complete production of various products.
 If the budget is prepared for a product which is of seasonal nature then budgets should cover one
seasonal cycle.
 The budget time period should be in tune with the period of financial information so that a
proper interpretation of budgets is made.
 Budgets should provide enough time limits to compare the same with the actual result and
allowing for financing for production.
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5. Implementation for preparing revising budget
Implications of probability when preparing and revising budgets:
Budgets are based on assumptions in the future and do not guarantee that the budgets prepared
by the company would match the actual data. Budgets are based on probability i.e. they are made
from probability about the outcome in future. Probability represents chances of happening of the
event in future. Budgets are decided on the basis of probability in future. Probability has a major
implication in preparing and revising of budgets as if the probability of an event in future
increases or decreases then the budgets will also have to be changed accordingly. Also, revision
of budgets is required in case of a change in the probability of a particular budget as the whole
budget is based on prediction and actual data is not used in any kind of budgets. If the probability
is ignored in preparing budgets then there would be a lot of variance between the actual and
budgeted data thus can cause losses to the company.
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6. Critical Dates and requirement for the company
Critical dates include the following that will require and generate resources for Houzit Pty Ltd in
the next financial cycle:
Month-end dates- Company will have to check on the last day of every month about the
availability and need for resources by the company. The company also will update the budgets
periodically and analyse the need for resources in the company.
Year-end or Quarter end dates- Company at the end of the year or quarter end should overview
about the total resources requirement and future plans made by the company by way of budgets
or capital budgeting decisions made thus year-end dates are critical for the company.
Howzit Pty Ltd can apply for the overdraft facility or credit limit facility in the banks so that in
case of need of resources the company it can easily avail the resources by this source of overdraft
facility immediately in the next financial year.
7. Recommendations for company
Items recommended for inclusion in the budgets for Houzit Pty Ltd are:
 Emergency Fund-Company should include in its budgets emergency funds for the unforeseen
circumstances like natural calamity or scarcity of resources which would be utilized by the
company in case of any such unforeseen circumstances.
 Provisions made- Provisions should be made for expenses which are bound to happen or which
are high in number as such provisions would help in covering the cost and would not cause
overburden on the company. For example, if there are doubtful debts or debts would become bad
then in that case provision for doubtful debts should be made by the company to cover such bad
debts.
 Expenses should be bifurcated or can be consolidated into different headings and subheadings
for a better understanding of expenses. For example telephone expense, electricity expense etc.
can be consolidated into the main heading of administrative expense and then these expenses can
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