Years 2 and 3 - Budgeting and Cash Flow

Subsection of: Amira's Story

Amira’s business continued growing after a slow but successful first year. We pick it up again in her third year of business and see how she learned about budgeting and cash flow. She now has her own production facility and an expanding market.

She followed the advice contained in the article “Budgeting as an effective control tool  and these were her conclusions.

Market assessment

The market is growing. New properties are being built in expensive parts of town. Businesses and government offices are relocating to the city in large numbers. Many clients have said they would buy more furniture if it was available. Sales volume can increase by 50%. That will be the target for next year.

Business capacity

  • The existing production facility equipment operates at only 60% capacity. There is no need for extra equipment.
  • Extra storage of raw materials will be required, estimated at 10% increase on current levels.
  • Two extra skilled staff will be required—one in production and a new position in quality control.
  • Refresher training in workplace safety will be required for all production staff due to increasing accident rate which threatens productivity.
  • Staff are available through internal promotion and a government supported apprenticeship scheme to replace promoted workers at a low cost.
  • Assumed that current management capacity is adequate.
  • Current owner/manager control level will be maintained.

Impact on costs

  • Wages will rise by the national inflation figure of 5%.
  • Raw materials will stay at the same cost.
  • Storage will rise by 3%.
  • No additional machinery required.
  • Assume other costs rise in line with inflation (i.e. 5%).

Funding

  • The business has enough cash to fund about half of the increase in costs.
  • Sales prices will rise by 2% on average only to make products more competitive. Other producers are increasing by the inflation rate of 5%.
  • Unable to negotiate lower prices for raw material and storage because the quantity purchased is not large enough to benefit from big quantity price reductions.
  • Costs of printing advertising leaflets and newspaper advertisements will be used to pay for online advertising services from a local marketing consultancy.
  • Overdraft facilities are available from the bank, but the price is high (20% per year).
  • A loan secured against the production equipment is available at 16% interest per year for 5 years.

The result of her budgeting exercise can be downloaded here.

Amira also prepared a cash flow forecast following the advice on the article “Cash forecasting". The result looked like this.

Find here some tips on how to use financial statements.

 

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