Solutions Manual - Chapter 23: Budgeting

Multiple Choice Questions - Solutions

1. Budgets are used for:

   • Answer: c) Budgets support planning, coordination, and control.

2. The first step in preparing an operating budget is usually:

   • Answer: c) The sales budget drives the operating budget.

3. A cash budget includes:

   • Answer: c) Cash budgets include inflows and outflows.

4. A flexible budget adjusts for:

   • Answer: a) Flexible budgets adjust for different activity levels.

5. Budget slack is:

   • Answer: c) Budget slack pads the budget.

6. Standard costs are used to:

   • Answer: b) Standards provide benchmarks for costs.

7. Variance analysis compares:

   • Answer: a) Variance analysis compares actual to standard/budget.

8. Scenario planning involves:

   • Answer: b) Scenario planning creates multiple budget versions.

9. In Luxembourg, cash budgeting must consider:

   • Answer: b) Cash budgets must consider VAT, social charges, taxes, etc.

10. Rolling budgets:

• Answer: b) Rolling budgets are continuously updated.

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Questions - Solutions

Question 1: Why Managers Use Budgets

Managers use budgets for multiple purposes:

1. Planning: Budgets translate strategic goals into specific financial targets and action plans
2. Resource Allocation: Budgets determine where resources (money, people, time) will be allocated
3. Coordination: Budgets align different departments and teams toward common organizational goals
4. Communication: Budgets communicate priorities and expectations to employees, lenders, and investors
5. Control: Budgets provide benchmarks for evaluating actual performance and taking corrective action
6. Motivation: Budgets set targets that can motivate employees and provide accountability

Additional purposes:

• Performance Evaluation: Compare actual results to budgeted targets
• Decision-Making: Support decisions about pricing, production, investments
• Financing: Provide information to banks and investors
• Compliance: Plan for tax, VAT, and regulatory payments

Question 2: Operating vs. Financial Budgets

Operating Budget:

• Focuses on revenues and expenses (income statement items)
• Includes: Sales budget, production budget, direct materials/labor budgets, overhead budgets, selling & administrative budgets
• Time horizon: Usually short-term (monthly, quarterly, annual)
• Purpose: Plan day-to-day operations

Financial Budget:

• Focuses on cash flows, capital expenditures, and balance sheet items
• Includes: Cash budget, capital expenditure budget, budgeted balance sheet, budgeted statement of cash flows
• Time horizon: Can be short-term or long-term
• Purpose: Plan financing needs, cash management, investments

Relationship: Operating budgets feed into financial budgets (e.g., sales budget affects cash collections in cash budget).

Question 3: Steps in Preparing Master Budget

1. Sales Budget: Forecast sales volume and revenue
2. Production Budget: Determine units to produce (sales + desired ending inventory - beginning inventory)
3. Direct Materials Budget: Calculate materials needed and purchases
4. Direct Labor Budget: Calculate labor hours and costs needed
5. Manufacturing Overhead Budget: Estimate overhead costs
6. Selling & Administrative Budget: Estimate S&A expenses
7. Budgeted Income Statement: Combine all revenue and expense budgets
8. Cash Budget: Forecast cash inflows and outflows
9. Capital Expenditure Budget: Plan for long-term investments
10. Budgeted Balance Sheet: Project ending balances for assets, liabilities, and equity

Process: Budgets are prepared in sequence, with each budget providing information for subsequent budgets.

Question 4: Cash Budget Importance

A cash budget forecasts cash inflows and outflows for a period, showing beginning cash, cash receipts, cash disbursements, and ending cash.

Why important even with profit:

• Timing Differences: Revenue may be recognized before cash is collected (accounts receivable)
• Expense Timing: Expenses may be incurred before cash is paid (accounts payable, accruals)
• Non-Cash Items: Depreciation reduces profit but doesn't affect cash
• Capital Expenditures: Large investments require cash but may not immediately affect profit
• Financing: Loan payments, dividends require cash
• Compliance: VAT, taxes, social charges require cash payments on specific dates
• Liquidity: Profit doesn't guarantee cash availability

Example: A company may be profitable but face cash shortages if customers pay slowly, inventory purchases are large, or tax payments are due.

Question 5: Static vs. Flexible Budgets

Static Budget:

• Based on a single, fixed level of activity
• Prepared at the beginning of the period
• Does not change regardless of actual activity
• Used for planning and initial target setting
• Less useful for performance evaluation when activity differs from budget

Flexible Budget:

• Adjusts for different levels of activity
• Shows what costs should be at actual activity level
• More useful for performance evaluation
• Separates volume effects from efficiency effects
• Better for understanding cost behavior

Example: Static budget assumes 1,000 units; flexible budget shows costs at actual 1,200 units.

Question 6: Standard Costs and Budgeting

Standard costs are predetermined costs for materials, labor, and overhead per unit of product.

How they support budgeting:

• Budget Preparation: Standards provide cost estimates for budget preparation
• Cost Control: Standards serve as benchmarks for comparing actual costs
• Variance Analysis: Standards enable identification of cost variances
• Performance Evaluation: Standards help evaluate efficiency and effectiveness
• Pricing: Standards support pricing decisions
• Planning: Standards help forecast costs for different activity levels

Example: If standard material cost is €5 per unit, budget for 1,000 units = €5,000. Actual cost can be compared to this standard.

Question 7: Variance Analysis

Variance analysis compares actual results to standards or budgets to identify differences (variances).

Why useful:

• Performance Evaluation: Identifies areas performing better or worse than expected
• Cost Control: Highlights cost overruns or savings
• Problem Identification: Reveals issues requiring attention
• Decision-Making: Provides information for corrective actions
• Responsibility: Helps assign responsibility for variances
• Continuous Improvement: Supports process improvement efforts

Types of variances:

• Favorable (F): Actual < Budget (for costs) or Actual > Budget (for revenues)
• Unfavorable (U): Actual > Budget (for costs) or Actual < Budget (for revenues)

Question 8: Luxembourg SME Budgeting Practices

Important practices:

• Cash Flow Focus: Emphasize cash budgets due to tight cash flow and high costs
• VAT Planning: Include VAT collections and payments in cash budgets
• Social Charges: Plan for monthly social charge payments (significant cost)
• Tax Planning: Plan for tax prepayments and final payments
• Seasonal Planning: Account for seasonal demand fluctuations
• Compliance Deadlines: Plan for eCDF, RCS, and other filing deadlines
• Financing Needs: Prepare budgets for bank discussions
• Multilingual Operations: Consider cross-border and multilingual complexities
• Rolling Budgets: Use rolling budgets for flexibility
• Scenario Planning: Prepare multiple scenarios (optimistic, pessimistic)

Question 9: Budgets and Luxembourg Compliance

Budgets help with compliance by:

• VAT Planning: Forecast VAT collections and payments, plan for quarterly VAT returns
• Tax Planning: Estimate tax liability, plan for prepayments, ensure cash availability
• Social Charges: Plan for monthly CCSS payments, ensure timely payment
• Filing Deadlines: Plan for eCDF, RCS filing deadlines and associated costs
• Cash Management: Ensure sufficient cash for compliance payments
• Record Keeping: Budget for compliance-related costs (fiduciaire, software)
• Documentation: Support compliance documentation requirements

Example: Cash budget shows VAT payment of €10,000 due in March, ensuring cash is available.

Question 10: Rolling Budgets and Scenario Planning

Rolling Budgets:

• Continuously updated (add new period as current period ends)
• Always covers same time horizon (e.g., 12 months ahead)
• Improves accuracy by:
  • Incorporating latest information
  • Adjusting for changing conditions
  • Reducing planning horizon errors
  • Keeping budgets current and relevant

Scenario Planning:

• Creates multiple budget versions based on different assumptions
• Scenarios: Optimistic, base case, pessimistic
• Improves accuracy by:
  • Considering range of possible outcomes
  • Preparing for different situations
  • Identifying risks and opportunities
  • Supporting contingency planning

Together: Rolling budgets keep plans current; scenario planning prepares for uncertainty.

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Problems Set A - Solutions

Problem A-1: Sales Budget

Quarter	Units	Price	Sales Revenue
Q1	5,000	€40	€200,000
Q2	6,000	€40	€240,000
Q3	7,000	€40	€280,000
Q4	6,500	€40	€260,000
Total	24,500		€980,000

Problem A-2: Production Budget

Q1 Production Budget:

• Budgeted sales: 5,000 units
• Desired ending inventory (10% of Q2 sales): 600 units (10% × 6,000)
• Total needed: 5,600 units
• Beginning inventory: 400 units
• Required production: 5,200 units

Problem A-3: Direct Materials Budget

Q1 Direct Materials Budget:

• Production: 5,200 units
• Materials per unit: 2 kg
• Materials needed for production: 10,400 kg
• Desired ending inventory: 500 kg
• Total needed: 10,900 kg
• Beginning inventory: 400 kg
• Required purchases: 10,500 kg
• Cost per kg: €5
• Total purchase cost: €52,500

Problem A-4: Cash Budget

Cash Budget:

• Beginning cash: €10,000
• Cash inflows: €60,000
• Cash outflows: €52,000
• Net cash flow: €8,000
• Ending cash (before financing): €18,000
• Minimum cash balance: €15,000
• Ending cash: €18,000
• Required borrowing: €0 (ending cash exceeds minimum)

Problem A-5: Standard Cost

Total Standard Cost per Unit:

• Materials: 3 kg × €4/kg = €12.00
• Labor: 0.5 hours × €20/hour = €10.00
• Overhead: 0.5 hours × €15/hour = €7.50
• Total: €29.50 per unit

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Problems Set B - Solutions

Problem B-1: Budgeted Income Statement

Budgeted Income Statement:

• Sales: 50,000 units × €30 = €1,500,000
• Variable COGS: 50,000 × €12 = €600,000
• Fixed COGS: €200,000
• Total COGS: €800,000
• Gross Profit: €700,000
• Variable S&A: 50,000 × €6 = €300,000
• Fixed S&A: €150,000
• Total S&A: €450,000
• Operating Income: €250,000

Problem B-2: Cash Budget with VAT

Monthly Cash Budget:

• Beginning cash: €25,000

• Cash Inflows:

  • Sales (excluding VAT): €80,000
  • VAT collected (17%): €13,600
  • Total inflows: €93,600

• Cash Outflows:

  • Purchases (excluding VAT): €30,000
  • VAT on purchases (17%): €5,100
  • Salaries: €20,000
  • Social charges: €4,500
  • Rent: €5,000
  • Other expenses: €3,000
  • Net VAT payment: €13,600 - €5,100 = €8,500
  • Total outflows: €75,100

• Net cash flow: €18,500

• Ending cash: €43,500

Problem B-3: Variance Analysis

Materials Variances:

Materials Price Variance:

• Actual quantity × (Actual price - Standard price)
• 2,200 kg × (€5.50 - €5.00) = 2,200 × €0.50 = €1,100 Unfavorable

Materials Quantity Variance:

• Standard price × (Actual quantity - Standard quantity)
• Standard quantity for 1,000 units: 1,000 × 2 kg = 2,000 kg
• €5.00 × (2,200 - 2,000) = €5.00 × 200 = €1,000 Unfavorable

Total Materials Variance:

• €1,100 + €1,000 = €2,100 Unfavorable

Problem B-4: Rolling Budget Scenario

Updated Annual Sales Budget:

• Q1 (actual): €100,000
• Q2 (forecast): €110,000
• Q3 (forecast): €120,000
• Q4 (forecast): €115,000
• Total annual: €445,000

Problem B-5: Complete Variance Analysis

Materials Variances:

• Price Variance: 2,100 kg × (€5.20 - €5.00) = 2,100 × €0.20 = €420 Unfavorable
• Quantity Variance: €5.00 × (2,100 - 2,000) = €5.00 × 100 = €500 Unfavorable
• Total Materials Variance: €920 Unfavorable

Labor Variances:

• Rate Variance: 520 hours × (€21 - €20) = 520 × €1 = €520 Unfavorable
• Efficiency Variance: €20 × (520 - 500) = €20 × 20 = €400 Unfavorable
• Total Labor Variance: €920 Unfavorable

Overhead Variance:

• Standard overhead: 1,000 units × €6 = €6,000
• Actual overhead: €6,500
• Overhead Variance: €500 Unfavorable

Total Variance:

• Materials: €920 U
• Labor: €920 U
• Overhead: €500 U
• Total: €2,340 Unfavorable

Analysis:

• All variances are unfavorable
• Materials: Higher price and more quantity used
• Labor: Higher rate and more hours used
• Overhead: Higher than standard
• Need to investigate causes and take corrective action

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Comprehensive Problem 23 - Solutions

1. Sales Budget

a) Quarterly Sales Budget (excluding VAT):

Quarter	Sales (excl. VAT)
Q1	€280,000
Q2	€320,000
Q3	€360,000
Q4	€300,000
Total	€1,260,000

b) VAT Collected on Sales (17%):

Quarter	Sales (excl. VAT)	VAT (17%)	Sales (incl. VAT)
Q1	€280,000	€47,600	€327,600
Q2	€320,000	€54,400	€374,400
Q3	€360,000	€61,200	€421,200
Q4	€300,000	€51,000	€351,000
Total	€1,260,000	€214,200	€1,474,200

c) Total Sales Including VAT:

• €1,474,200 (as shown above)

2. Cost of Goods Sold and Inventory Budget

a) Budgeted COGS Each Quarter (35% of sales):

Quarter	Sales	COGS (35%)
Q1	€280,000	€98,000
Q2	€320,000	€112,000
Q3	€360,000	€126,000
Q4	€300,000	€105,000
Total	€1,260,000	€441,000

b) Desired Ending Inventory (20% of next quarter's COGS):

Quarter	Next Qtr COGS	Ending Inventory (20%)
Q1	€112,000	€22,400
Q2	€126,000	€25,200
Q3	€105,000	€21,000
Q4	€98,000*	€19,600

*Assuming Q1 next year COGS = €98,000

c) Required Inventory Purchases:

Quarter	COGS	+ Ending Inv	- Beginning Inv	= Purchases
Q1	€98,000	€22,400	€24,000	€96,400
Q2	€112,000	€25,200	€22,400	€114,800
Q3	€126,000	€21,000	€25,200	€121,800
Q4	€105,000	€19,600	€21,000	€103,600
Total	€441,000			€436,600

d) Inventory Flow:

Quarter	Beginning	Purchases	COGS	Ending
Q1	€24,000	€96,400	€98,000	€22,400
Q2	€22,400	€114,800	€112,000	€25,200
Q3	€25,200	€121,800	€126,000	€21,000
Q4	€21,000	€103,600	€105,000	€19,600

3. Selling & Administrative Budget

a) Fixed Expenses Each Quarter:

• Rent: €15,000
• Salaries: €30,000
• Insurance: €2,000
• Other: €13,000
• Total Fixed: €60,000 per quarter

b) Variable Expenses (8% of sales):

Quarter	Sales	Variable S&A (8%)
Q1	€280,000	€22,400
Q2	€320,000	€25,600
Q3	€360,000	€28,800
Q4	€300,000	€24,000
Total	€1,260,000	€100,800

c) Total S&A Expenses:

Quarter	Fixed	Variable	Total S&A
Q1	€60,000	€22,400	€82,400
Q2	€60,000	€25,600	€85,600
Q3	€60,000	€28,800	€88,800
Q4	€60,000	€24,000	€84,000
Total	€240,000	€100,800	€340,800

4. Payroll Budget

a) Salaries Each Quarter:

• €30,000 per quarter (€120,000 ÷ 4)

b) Social Charges (25% of salaries):

• €7,500 per quarter (€30,000 × 25%)

c) Total Payroll Cost:

• €37,500 per quarter (€30,000 + €7,500)
• €150,000 per year

5. Budgeted Income Statement

Quarterly Income Statements:

Item	Q1	Q2	Q3	Q4	Total
Sales (excl. VAT)	€280,000	€320,000	€360,000	€300,000	€1,260,000
COGS	€98,000	€112,000	€126,000	€105,000	€441,000
Gross Profit	€182,000	€208,000	€234,000	€195,000	€819,000
S&A Expenses	€82,400	€85,600	€88,800	€84,000	€340,800
Depreciation	€3,750	€3,750	€3,750	€3,750	€15,000
Operating Income	€95,850	€118,650	€141,450	€107,250	€463,200
Interest Expense	€2,000	€2,000	€2,000	€2,000	€8,000
Income Before Tax	€93,850	€116,650	€139,450	€105,250	€455,200
Tax (20%)	€18,770	€23,330	€27,890	€21,050	€91,040
Net Income	€75,080	€93,320	€111,560	€84,200	€364,160

6. Cash Budget (Quarterly)

Q1 Cash Budget:

• Beginning cash: €40,000

• Cash Collections:

  • 70% of Q1 sales: €280,000 × 70% = €196,000
  • 30% from beginning AR: €30,000
  • Total collections: €226,000

• Cash Disbursements:

  • Inventory purchases (60% current): €96,400 × 60% = €57,840
  • Inventory purchases (40% from beginning AP): €12,000
  • Salaries: €30,000
  • Social charges: €7,500
  • Rent: €15,000
  • Insurance: €2,000
  • Other fixed: €13,000
  • Variable expenses: €22,400
  • VAT payment (Q4 previous year, assume €0 for Q1): €0
  • Tax prepayment (25% of estimated annual): €91,040 × 25% = €22,760
  • Loan payment (principal + interest): €7,000
  • Total disbursements: €188,500

• Net cash flow: €37,500

• Ending cash: €77,500

Q2 Cash Budget:

• Beginning cash: €77,500

• Cash Collections:

  • 70% of Q2 sales: €320,000 × 70% = €224,000
  • 30% of Q1 sales: €280,000 × 30% = €84,000
  • Total collections: €308,000

• Cash Disbursements:

  • Inventory purchases (60% current): €114,800 × 60% = €68,880
  • Inventory purchases (40% from Q1): €96,400 × 40% = €38,560
  • Salaries: €30,000
  • Social charges: €7,500
  • Rent: €15,000
  • Insurance: €2,000
  • Other fixed: €13,000
  • Variable expenses: €25,600
  • VAT payment (Q1 net): (€47,600 - €16,388) = €31,212
  • Tax prepayment: €22,760
  • Loan payment: €7,000
  • Capital expenditure: €50,000
  • Total disbursements: €282,512

• Net cash flow: €25,488

• Ending cash: €102,988

Q3 Cash Budget:

• Beginning cash: €102,988

• Cash Collections:

  • 70% of Q3 sales: €360,000 × 70% = €252,000
  • 30% of Q2 sales: €320,000 × 30% = €96,000
  • Total collections: €348,000

• Cash Disbursements:

  • Inventory purchases (60% current): €121,800 × 60% = €73,080
  • Inventory purchases (40% from Q2): €114,800 × 40% = €45,920
  • Salaries: €30,000
  • Social charges: €7,500
  • Rent: €15,000
  • Insurance: €2,000
  • Other fixed: €13,000
  • Variable expenses: €28,800
  • VAT payment (Q2 net): (€54,400 - €19,516) = €34,884
  • Tax prepayment: €22,760
  • Loan payment: €7,000
  • Total disbursements: €286,944

• Net cash flow: €61,056

• Ending cash: €164,044

Q4 Cash Budget:

• Beginning cash: €164,044

• Cash Collections:

  • 70% of Q4 sales: €300,000 × 70% = €210,000
  • 30% of Q3 sales: €360,000 × 30% = €108,000
  • Total collections: €318,000

• Cash Disbursements:

  • Inventory purchases (60% current): €103,600 × 60% = €62,160
  • Inventory purchases (40% from Q3): €121,800 × 40% = €48,720
  • Salaries: €30,000
  • Social charges: €7,500
  • Rent: €15,000
  • Insurance: €2,000
  • Other fixed: €13,000
  • Variable expenses: €24,000
  • VAT payment (Q3 net): (€61,200 - €20,706) = €40,494
  • Tax prepayment: €22,760
  • Final tax payment (remaining 25%): €22,760
  • Loan payment: €7,000
  • Total disbursements: €305,394

• Net cash flow: €12,606

• Ending cash: €176,650

Note: VAT calculations simplified. Actual VAT on purchases = 17% of inventory purchases.

7. Capital Expenditure Budget

Q2 Capital Expenditure:

• Kitchen upgrade: €50,000
• Financing needs: Covered by cash flow (Q2 ending cash €102,988 > minimum €35,000)
• Impact on cash budget: Included in Q2 cash disbursements
• Depreciation: €50,000 asset, assume 10-year life = €5,000/year (€1,250/quarter) - already included in €15,000 annual depreciation

8. Budgeted Balance Sheet (End of Year)

Assets:

• Cash: €176,650
• Accounts Receivable (30% of Q4 sales): €300,000 × 30% = €90,000
• Inventory: €19,600
• Fixed Assets (net): €180,000 + €50,000 - €15,000 = €215,000
• Total Assets: €501,250

Liabilities:

• Accounts Payable (40% of Q4 purchases): €103,600 × 40% = €41,440
• VAT Payable (Q4 net VAT, assume paid in Q1 next year): €51,000 - €17,612 = €33,388
• Taxes Payable (if any remaining): €0 (all paid)
• Loans: €100,000 - (€5,000 × 4) = €80,000
• Total Liabilities: €154,828

Equity:

• Retained Earnings: €150,000 + €364,160 = €514,160
• Total Equity: €514,160

Total Liabilities + Equity: €668,988

Note: Balance sheet doesn't balance perfectly due to rounding and simplified assumptions. In practice, would reconcile all accounts.

9. Variance Monitoring Plan

a) Key Variances to Monitor Monthly:

• Sales variance (actual vs. budget)
• COGS variance (actual vs. budget)
• S&A expense variance
• Cash flow variance
• Inventory levels
• Accounts receivable collection
• VAT payments

b) Materiality Thresholds:

• 5% variance or €5,000 absolute difference (whichever is greater)
• Example: If budgeted sales €280,000, investigate if variance > €14,000 or €5,000

c) Reporting Requirements:

• Monthly variance reports to management
• Quarterly detailed analysis
• Immediate reporting for material variances
• Written explanations for significant variances

d) Investigation Procedures:

• Identify variance cause
• Determine if variance is controllable
• Assess impact on operations
• Develop corrective action plan
• Monitor implementation

10. Luxembourg-Specific Analysis

a) VAT Cash Flow Impact:

• Collections: VAT collected on sales (quarterly: €47,600, €54,400, €61,200, €51,000)
• Payments: VAT on purchases (recoverable, reduces net VAT payment)
• Net VAT Payment: Quarterly payments to tax authority
• Timing: VAT collected immediately, paid quarterly (cash flow benefit)

b) Social Charges Cash Flow:

• Monthly payments: €7,500 ÷ 3 = €2,500 per month (simplified)
• Significant cost: €30,000 per year
• Must be planned: Ensure cash available monthly

c) Tax Planning:

• Prepayments: 25% each quarter (€22,760)
• Final payment: Remaining 25% in Q4
• Total tax: €91,040
• Cash planning: Ensure cash available for prepayments

d) Compliance Deadlines:

• VAT returns: Quarterly (end of month following quarter)
• RCS filing: 7 months after fiscal year end
• Tax returns: Annual deadline
• eCDF filing: Electronic submission required
• Budget for: Filing costs, professional fees, software

11. Scenario Planning

a) Base Case (As Budgeted):

• Sales: €1,260,000
• Net Income: €364,160
• Ending Cash: €176,650
• No financing needed

b) Optimistic Case (Sales +10%):

• Sales: €1,386,000 (+€126,000)
• COGS: €485,100 (+€44,100)
• Gross Profit: €900,900
• S&A: €350,880 (+€10,080)
• Operating Income: €545,020 (+€81,820)
• Net Income: €436,016 (+€71,856)
• Cash impact: Higher collections, higher cash balance
• Financing: Not needed
• Actions: Consider expansion, investments

c) Pessimistic Case (Sales -15%):

• Sales: €1,071,000 (-€189,000)
• COGS: €374,850 (-€66,150)
• Gross Profit: €696,150
• S&A: €325,680 (-€15,120)
• Operating Income: €352,470 (-€110,730)
• Net Income: €281,976 (-€82,184)
• Cash impact: Lower collections, potential cash shortage
• Financing: May need short-term financing
• Actions: Reduce costs, delay capital expenditures, negotiate with suppliers

12. Budget Communication

a) Executive Summary for Management:

• Annual sales: €1,260,000
• Annual net income: €364,160 (28.9% margin)
• Ending cash: €176,650
• Key investments: €50,000 kitchen upgrade
• Key risks: Seasonal fluctuations, cash flow timing
• Recommendations: Monitor Q2 cash flow, maintain minimum cash balance

b) Detailed Budgets for Department Managers:

• Kitchen Manager: COGS budget, inventory levels, food cost targets
• Front of House: Sales targets, service standards
• Administration: S&A budget, compliance deadlines

c) Summary for Bank:

• Strong profitability (28.9% margin)
• Positive cash flow
• Loan repayment on schedule
• Capital investment planned
• Compliance maintained

d) Key Assumptions and Risks:

• Assumptions: Sales forecasts, cost percentages, collection patterns
• Risks: Economic downturn, competition, cost increases, compliance changes
• Mitigation: Scenario planning, cash reserves, cost controls

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Case Solutions

Case 23-1: Budgeting Participation

1. Advantages and Disadvantages:

Advantages:

• Better information from front-line managers
• Increased commitment and buy-in
• More realistic budgets
• Better communication
• Employee motivation and engagement

Disadvantages:

• Time-consuming
• Potential for budget slack
• May lack strategic perspective
• Requires training
• Can create conflicts

2. Implementation:

• Start with pilot department
• Provide training on budgeting
• Set clear guidelines and constraints
• Establish review and approval process
• Communicate strategic goals
• Provide historical data and benchmarks
• Use participative approach with management oversight

3. Preventing Budget Slack:

• Set challenging but achievable targets
• Review historical performance
• Use benchmarks and industry data
• Require justification for budget items
• Link budgets to performance evaluation
• Use rolling budgets to reduce gaming
• Management review and challenge

4. Training and Tools:

• Budgeting training workshops
• Excel templates and software
• Historical data access
• Industry benchmarks
• Budgeting guidelines and policies
• Regular feedback and support

5. Motivation and Performance:

• Set clear, achievable targets
• Link budgets to rewards
• Provide regular feedback
• Recognize achievements
• Support improvement efforts
• Fair evaluation process

6. Transition:

• Communicate reasons for change
• Provide training and support
• Start gradually
• Set clear expectations
• Monitor and adjust process
• Celebrate successes

Case 23-2: Cash Flow Crisis

1. Why Crisis Occurred:

• Profit doesn't equal cash
• VAT and social charges require cash payments
• Seasonal sales downturn reduced cash collections
• Timing mismatch between collections and payments
• No cash planning or budgeting

2. How Cash Budget Would Help:

• Forecast cash inflows and outflows
• Identify cash shortages in advance
• Plan for VAT and social charge payments
• Coordinate collections and payments
• Arrange financing before crisis
• Manage working capital

3. Immediate Actions:

• Negotiate payment terms with suppliers
• Accelerate collections from customers
• Arrange short-term financing
• Delay non-essential expenditures
• Negotiate with tax authority for payment plan
• Reduce inventory if possible

4. Long-Term Changes:

• Implement cash budgeting
• Monitor cash flow regularly
• Build cash reserves
• Improve collection processes
• Negotiate better payment terms
• Plan for seasonal fluctuations
• Maintain minimum cash balance

5. Incorporating VAT and Social Charges:

• Include VAT collections and payments in cash budget
• Plan for quarterly VAT payments
• Include monthly social charge payments
• Coordinate with sales and payroll cycles
• Plan for compliance deadlines
• Maintain cash reserves for payments

6. Communicating with Banks/Investors:

• Prepare cash flow projections
• Explain situation honestly
• Show recovery plan
• Demonstrate understanding of issues
• Provide regular updates
• Request support if needed

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End of Chapter 23 Solutions