Budget Controls and Monitoring FINA 425- Unit 5 - Scenario
Dancin' Donuts, established in January 2019, is a thriving new business specializing in low-carb donuts. The 2019 keto diet fad led to increased sales, and the chief financial officer (CFO) prepared a robust budget for 2020. In early March 2020, the small business had record-breaking sales but abruptly needed to shut its doors because of the global pandemic. The CFO conducted the following analysis for the month of March:
Please answer the following questions:
What does AVB stand for?
What is the total revenue for March 2020 when compared to the budget?
What is the variance from the budget in the net income for the month?
What is the income tax percentage for the month?
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Budget Controls and Monitoring
Most companies make budgets for their expenditure and cash flows to understand how to allocate their resources. Their financial resources are allocated according to the expenditure needed and the cash flow expected. At the end of the projects or the year, they will also make a financial record to show their expenditure and the revenue they received from all the projects they engaged in. this is the way they understand and evaluate their performance based on the actual and the budgeted results they have recorded throughout the project life span.
AVB stands for Actual Versus Budget variance. It is the process by which a business compares it's actual or the planned expenditure or cash flows and the actual results. With the budget variance, a firm can clearly see the difference between their planned expenditure and the actual expenditure they will be facing. They tend to evaluate the performance between their product lines, departments, or projects using the AVB method to understand which one is more viable. This helps in the future allocation of financial resources to ensure the projects; departments or product lines have adequate resources in relation to their cash flows. The company uses AVB to make predictions for future projects or product lines to help understand where to improve in order to increase their expected results. When they get their actuals, they could find out why their goals were exceeded and how to maintain or why their goals were not reached, and what to do to reach the goals. With AVB, better financial decisions are made that make the company financially viable and efficient.
In 2020 March, the total revenue was $196,947. This month, the budget was $200,000. However, the actual total revenue showed a deviation from the budgeted revenue which clearly shows the existence of a deviation. The actual revenue for this month comes as $3,053 less than the initial project of 200, 000. It can be said there is a variance in this budget which results in a 2% variance between the two. However, it is a negative variance since the deviation brings a -2% variance which shows that the actual revenue was reduced by $3,053 which leads to -2%. With the reduced revenue, the company could evaluate why it failed to reach its goal and what it could do to improve the revenue. It also helps find out better strategies that can increase the revenue of the company. Some may be increasing their sales or improving their marketing strategies to reach more customers and increase sales volumes (Cross, 2019).
The month showed a variance in the net income. The budgeted net income for this month was $5,460. However, it was noted that there was a chance in the actual net income which was recorded at $6,764. From this clear indication, there is a difference in the actual and budgeted net income. This is a $ 1,304 difference in the net income. The AVB has a positive hence the net income variance is 24%. This indicates an increase in the net income of the company in the month of March 2020. The positive variance shows the company reached its goals. This could be a motivation to the company and the employees to keep working to increase the net income of the company. It helps understand the progress the company has made in the positive direction and helps set new records that push the company to test its limits on a higher level (Cross, 2019).
Tax is an inevitable expenditure by the business and also its responsibility. Paying taxes helps fulfill the business obligations to the government and helps finance government needs and projects. The business pays a tax of 30% of its earnings every month. This month they paid $ 2,899. This was 30% of their actual earnings of $9,662, which shows the earnings before taxes are paid. This is different from the budgeted tax to be paid which was $ 2,340. It gave a 24% variance in the positive way showing the increased tax ailment. The business paid more taxes than projected which could be explained as the result of their increased performance, the more they earn, the more they pay taxes. As much as it may be seen as a disadvantage because they will be spending more on taxes when they do well, it is a clear indication of how well the business is doing in the environment. Such performance is needed for the business to expand as they understand as they grow, more responsibilities will come their way.
In conclusion, a business should be able to understand the value of budgeting in its operation. Making realistic and viable budgets will help guide the business in the right direction. Despite the pandemic that brought a lot of challenges that made the business close down the operations of the business, they would have done well. The AVB made was a clear indication that the business had done well compared to the projected performance they had expected. In such a case scenario, their business had potential and they would have used the results to find ways in ensuring they would still perform amidst the challenges by coming up with new strategies to suit the situation at hand. The owner can thus, learn from the results they got and plan well on how to come back to business when everything has calmed down. The analysis will help formulate new and effective strategies for success in the future.
Reference
Cross V. (2019). The Role of Variance Analysis in Businesses. Chron. https://smallbusiness.chron.com/role-variance-analysis-businesses-22641.html
Wall street prep. (2019). Budget to Actual Variance Analysis in FP&A. https://www.wallstreetprep.com/knowledge/budget-actual-variance-analysis-fpa/
Williams, J. (2020). Financial & Managerial Accounting (19th Edition). McGraw-Hill Higher Education (US). https://aiu.vitalsource.com/books/9781260706178
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