Preparing a budget is essential to any successful business operation. Planning and adhering to a realistic budget is a strategic means of forecasting future possible events, of making plans for negative outcomes (dip in sales, etc.), and of implementing strategic means by which profits can be made. This paper will address the importance of a realistic budget, will pinpoint the differences between a static and a flexible budget, and will demonstrate the efficiency and usefulness of implementing a budget by using the Babycakes company as a case study. During the fourth quarter of 2016, the owners of Babycakes will see the benefits of creating three new seasonal products made especially for Halloween, Veterans’ Day and Christmas. These three new seasonal products will help boost sales and incite teams at Babycakes to work harder in order to generate more profit in the future. That being said, this paper will also demonstrate the need for caution and careful planning, given that small businesses often suffer from unpredictable events that may hurt their overall business profile.
Benefits of a realistic budget: Having a realistic budget and framing the company’s future actions around such a budget is a strategic means of preserving the company’s profile among competitors, becoming responsible and effective around money, and of predicting cash flow and profit. The future of any company is at the mercy of events that cannot be mapped out with precision. For example, weather changes and economic fluctuations on the market can prompt customers to reduce, even slash, their spending habits. For Babycakes, I would argue that the post New-Year season is the hardest season, given that customers often take on new diet resolutions that target the elimination of sugary foods. In this regard, it is paramount for Babycakes to implement a budget that allows its owners to target a production budget that carefully balances out production needs (including pans, baking materials, and employees) with revenue (hard sales). Budgeting fulfils several useful purposes including resource allocation as well as planning and awareness and performance evaluation in a complex organization (Gustafssohn, 2010). That is where a budget comes in. Without a budget, the success of Babycakes would plummet because no guidelines would be followed.
New seasonal products: For October, Babycakes is planning on making small, black-and-orange cupcakes made with zigzagging designs that evoke spiderwebs and other funky designs. These cupcakes are a delicious variation on the strawberry shortcake that the company is renowned for. For November, Babycakes will be making cupcakes in honor of Veterans’ Day. The cupcakes will be decorated with red, white and blue icing representing the U.S. flag, the faces of Hillary Clinton and of Donald Trump, as well as with creative designs such as “In God We Trust”. For Christmas, Babycakes will be undertaking more ambitious projects, given that customers tend to spend more on this particular holiday (Saad, 2015). As such, Babycakes employees will be busy making medium to large chocolate frosted cakes decorated with snowmen, Santa Claus figures and reindeers.
Estimations: These estimations are ambitious in scope. The sales price of these products is higher than that of non-seasonal products because they necessitate more time, energy and generally speaking products that tend to be more costly. It is unlikely that Babycakes will derive a profit that mirrors such strong numbers, yet forecasting such numbers will boost employee morale, incite workers to attain these new numbers that will generate a comfortable net profit, while respecting realistic guidelines.
Benefits of a flexible budget: A budget that never changes is called static, whereas one that adapts to fluctuating events, isolated incidents and unforeseen circumstances is known as a flexible budget. Static budgets are usually planned out a year in advance, usually broken down into smaller, more comprehensive parts that target variance analysis. That being said, static budgets often fail because they do not incorporate actual or new data that helps business owners predict the future months of operation. This explains why the owner of Babycakes is confused when her static budget shows an unfavourable variance. In this sense, flexible budgets are more sophisticated and detailed means of understanding a company’s past, present and future performance habits. Business owners who use flexible budgets can alter their budget ratios, evaluations and forecasts as the year progresses, which allows them to stay on track of monthly changes to their operating business. They can put money aside for fixed expenses (rent, etc.) and be prepared for variable expenses (increased number of orders, etc.). In other words, flexible budgets provide company owners with better leverages of control over their business if compared to static budgets. In short: flexible budgets are adaptable, whereas static budgets are not. The sales budget prepared for the last quarter of 2016 reflects sales to grow gradually from October to December, given that customer shopping/spending trends are usually higher in December (Saad, 2015). That being said, the owners of Babycakes should always implement a cautious outlook on future sales, given that the Christmas/New Year is an ambivalent spending season. Last year, for instance, December sales were flat although incomes rose 0.3% during the month (Sussman, 2016). It is best to combine optimistic and cautious attitudes during this time of the year.
Financial challenges, or how to avoid overspending: Any business can easily lapse into overspending. Many owners of small businesses like Babycakes set out to budget their spending carefully but end up surprised, at the end of each month, which how much money they have allotted to seemingly innocuous causes that end up making a big dent in their bank account. The following rules are two ways in which to avoid overspending:
1—Know where your money is going. Babycakes would do well to avoid lumping all of their monthly expenses under a tab that is simply labelled as “Operating Expenses.” Although this may initially seem like a good idea, avoiding future headaches, putting all spending incomes together in a file only make it harder to know exactly how much money goes where. Given that Babycakes is in a financially precarious situation, it needs to slash expenses as much as possible in order to carefully budget its gross margin on products and services.
2—Shop around for insurance plans. Insurance coverage is a necessary part of any business, but spending too much on general property or employee benefits, for instance, may hurt your business more than protect it. It is best to shop around, ask diligent questions, and never, ever take the first insurance plan that comes your way. Sometimes, insurance brokers launch into detailed explanations of expensive programs that you very simply do not need. Naturally, it is important to cover the basics, but other than that there is no need to be forking out money for improbable, if indeed impossible, events. (I was often lured into insurance plans that covered parts of property I didn’t even know existed, and after some research I discovered that I was paying much too much per month for pieces of property that were not even mine in the first place). Finally, make sure to evaluate your current insurance program with a licensed broker you feel you can trust.
- Gustafsson, M. (2010). Budget—a perfect management tool? https://gupea.ub.gu.se/bitstream/2077/22617/1/gupea_2077_22617_1.pdf
- Saad, L. (2015). Americans Plan on Spending A Lot More This Christmas. Gallup. doi: http://www.gallup.com/poll/186620/americans-plan-spending-lot-christmas.aspx
- Sussman, A. (2016). U.S. Consumer Spending Flat in December. The Wall Street Journal. doi: http://www.wsj.com/articles/u-s-consumer-spending-flat-in-december-1454333571
- Zeller, T. (2013). Good Bye Traditional Budgeting, Hello Rolling Forecast: Has the Time Come? American Journal of Business Education 6 (3), 299-310. doi: http://files.eric.ed.gov/fulltext/EJ1054390.pdf