Essay Example on Importance of Budgeting for Babycakes Bakery

Budgeting is a very important component of any business organization. There are many benefits that can be associated with budgeting as opposed to lack of budgeting at all. In the case of Babycakes, budgeting helps the owner to be more efficient (Churchill, 2015). With the help of a budget, the owner will be in a better position to plan the activities that should be carried out in each given day and the associated costs. As a result, they will avoid unnecessary wastage of resources, adopt a lean expenditure and as a result, the company can make better profits. The owner of Babycakes, through the help of a budget can also judge the companys performance in a better way. She can compare the expected sales with the actual sales and from the difference she can be able to tell how the company is performing. Consequently, she can make the right decision regarding any improvements that might be required. Budgeting also helps her company to be more responsible with spending. She is able to determine where and how money is spent. Therefore, she can prioritize the companys spending based on urgency and importance.

Not having a budget could be risky to the business (University of Cambridge, 2017). If Babycakes did not have a budget at all, its income will significantly decrease. The company will not know the number of units it should bake in a day and hence it will end up baking more than required. Ideally, a cake producing company wants to produce enough cakes for the day such that it will not have remainders at close of business. At the same time, it wants to produce enough such that there will be no shortages. Babycakes will not be able to have this forecast if it didnt have a budget. Lack of enough production will reduce the level of sales and revenue respectively. Over production will create wastage which in turn will also affect revenue.

Sales Budget for the LA Store for the 4th quarter of 2016

On Valentines Day, Babycakes sells approximately 1,500 cakes. Each cake is sold at $3.5. It is assumed that in the months of October, November and December the sales will be one-half of Valentines Day sales. This is equal to 750 units per day. Therefore the sales budget for these months would be as follows.

Number of Units Total Units Sales Price Total sales

October 750 units 22,500 $3.5 $78,750

November 750 Units 22,500 $3.5 $78,750

December 750 Units 22,500 $3.5 $78,750

Total Sales $236,250

New Products

For the holiday seasons, Babycakes could add a few products. The proposed products are; Sweetie Pie Cupcakes, Vanilla Cupcakes and Black Cherry Cakes. The expected sales for these new products are expected to be 1,000 units for each holiday. The sales price would be $3.5 as well. The budget will therefore be as follows;

Number of Units Total Units Sales Price Total sales

October Velvet Cakes 750 units

Sweetie Pie 500 units

Vanilla cakes 500 units

Black Cherry 500 units 22,500

500

500

500 $3.5

$3.5

$3.5

$3.5 $78,750

$1,750

$1,750

$1,750

November Velvet Cakes 750 units

Sweetie Pie 500 units

Vanilla cakes 500 units

Black Cherry 500 units 22,500

500

500

500 $3.5

$3.5

$3.5

$3.5 $78,750

$1,750

$1,750

$1,750

December Velvet Cakes 750 units

Sweetie Pie 500 units

Vanilla cakes 500 units

Black Cherry 500 units 22,500

500

500

500 $3.5

$3.5

$3.5

$3.5 $78,750

$1,750

$1,750

$1,750

Total Sales $252,000

Advantages of a flexible budget over static budget

Business operates in an uncertain environment. It is not possible to precisely predict the activities for the next couple of days, weeks or months. Therefore, preparing a static budget could be inconveniencing for the owner of Babycakes. For instance, if in the month of December there is an increased volume of business activities, a flexible budget can be adjusted accordingly (AccountingCoach, 2017). The company can provide funds for more production in this case. However, in the case of a static budget, production might stay constant despite an increase in the volume of activities. This will be reflected in a loss of sales since the budget does not have provision for extra production. On the other hand, in the event that the cost of raw materials for production increases in the month of November, the company will not have extra funds to cater for the increase. This will mean that it will buy fewer raw materials. As a result, it will produce fewer cakes and hence lose sales and revenue respectively. Flexible budget is more beneficial since it can be adjusted anytime based on the level of activities. This would avoid the variances that the Babycakes experiences.

Budgetary Controls

In the event that there are financial challenges in the company that are causing the company to overspend, the owner of Babycakes can take measures to cut down on some costs. For instance, she could use cheaper labor for the production of same number of units. Possibly, she could also buy cheaper raw materials if they are available. In order to cover up for the increase in expenditure, the owner could also increase the selling price. This would reduce the chances of a loss.

References

AccountingCoach, LLC. (2017). What is a flexible budget?. Online from <> Viewed September 4, 2017

Churchill N. E. (2015).Budget Choice: Planning Versus Control. Business Review. Online from < https://hbr.org/1984/07/budget-choice-planning-versus-control> Viewed September 4, 2017

University of Cambridge (2017). Budgetary Planning & Control. Finance Division. Online from <.https://www.finance.admin.cam.ac.uk/policy-and-procedures/financial-procedures/chapter-2-budgetary-planning-control> Viewed September 4, 2017