Developing a Budget Statement Assignment Introduction Preparing a budget is a necessity for every business

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Developing a Budget Statement Assignment

Introduction

Preparing a budget is a necessity for every business. It’s not enough just to sell the product without a decided budget in mind. A budget is necessary to earn profits along with keeping a control over production costs. In this paper, we have included the budget statement of the balance sheet, the cash flow & profit and loss considering the new business idea of introducing snack bars and cookies and manufacturing them. While some information is supported by secondary research in preparing the budget, some is acquired through sources directly or indirectly associated with Wize.

What is a budget statement and why is it needed?

A budget statement is the statement which includes the estimated profits, revenues and expenses of the company in the upcoming years. It helps the companies to make decision better and allocate the resources effectively and efficiently (Hilton, 2007). The main objective is to make the company capable of fulfilling goals and financial targets in a better way. According to Picincu (2020), if we are planning to buy some new products or equipment for the company or trying to hire new people then proper budgeting is very important. If we talk about the managers, then this will help them to justify the resource that is needed for any particular project and to attract the investors too. Moreover, it also encourage the employees to work together towards a single goal and helps in attaining it.

Thus, by developing a budget statement, there will be a better understanding of how much finance is needed by the company in the first year and also an overall projection of expenses, revenue, and other variables.

Budgeted Income Statement:

Cost of goods sold:

Let’s say the target sale for snack bar and cookies is 5000 each per month, which amounts to 60000 units each annually. Coffee leaf as an ingredient would amount to 5 grams in each unit. So, the amount of coffee leaves needed would be (60000 + 60000) * 5 grams = 600000 grams or 600kg annually. The cost of coffee leaf is $12 per kg, so, coffee leaf cost for producing snack bars and cookies will be $7200 per year. If we include additional ingredients like sugar, butter, flour, etc., the total cost per year would approximately be $20000.

Revenue:

The price for the snack bar is let’s say set at $3.00 and that of cookies at $10.00. So, with 60000 units each sales projection, the revenue would be 60000*3 + 60000*10 = 780000.

Rent:

Currently, the warehouse of the company is located in South Surrey, where the average monthly rent for 20000 sq. ft. facility is $18000. So, annual expenditure on rent will be $216000.

Wages & Salary:

For producing 5000 units per month, let’s say there will be 10 people working on production line. The average annual salary of production worker is $38,284 with an hourly wage of $18 (Economic Research Institute, n.d.). For 10 people, the wage expenditure will be $382840. Salary for 2 managers and 3 supervisors is assumed to be $96,000 and $126,000 per year, respectively.

Promotion & Marketing:

Marketing can be leveraged because Wize can use the same platforms for promoting the snack bars as they do for their drinks. Facebook and Instagram are the major social media advertising platforms currently, and the budget set for these platform can be estimated to be $50,000 yearly.

Transportation:

One pallet of coffee leaf consists of 30 bags of 25 kg each for producing iced teas and other drinks at Wize, which means 750 kg is carried by one pallet. For producing snack bars and cookies, we need 600 kgs (calculated before) per year, so, there is a need of 24 more bags (almost 1 pallet) of coffee leaf. Considering the duties, tariffs, customs and so on., along with shipping cost, it can be said that one pallet would cost $5000.

Corporate tax:

The BC provincial corporate tax is 12%, and when combined with federal rate, it becomes 27% (Trade and Invest British Columbia, n.d.).

Revenue	780000
Cost of goods sold	27200
Gross Profit	752800
Expenditure
Rent	216000
Wages & Salary	604860
Promotion and Marketing	50,000
Transportation	5000
Total Expenditure	875860
EBIT	(123060)
Corporate Tax (27%)	(33226)
Net Income	(156286)

Budgeted Balance Sheet

Cash:

Cash and cash equivalent is calculated from the cash flow statement which comes out to be $512374.

Inventory:

Total cost of raw material is $27200 which is transferred to the balance sheet.

Prepaid Expenses:

Prepaid expenses for the transportation of goods are expected to be half the amount, considering the payment responsibility could be either on the supplier or the company, which is $2500.

Other expenses:

These expenses include miscellaneous expenses which are not directly included in the company’s main business and are estimated to be $14762.

Property, Plant, and Equipment:

Property, plant and equipment includes the rent, the cost of machinery and is valued at approximately 250,000.

Other non current assets:

Intellectual property rights are included in other non current assets and according to York University (2020), the average cost of patents for small entity including patents is around $3200. Copyright registration and acceptance costs $50 (Government of Canada, 2018). Trademarks registration costs around $3000-5000 for majority of registrations (Heer, 2021), so an amount of $3000 is considered for trademarks. Total other non current assets are valued $6250.

Current liabilities:

Short term debt, income tax expense, and accrued wages and salary are valued at $80000, $33226.2, and $604860 respectively because of wages and salary, and income tax expense expenses indicated in pro forma income statement.

Long term liabilities and shareholders equity:

Long term debt is valued at 150000 for long term finance requirements and owner’s equity is amounted 300000.

Assets	Amount	Liabilities & Shareholders Equity	Amount
Current assets:		Current liabilities:
Cash	512374	Short-term debt	30000
Inventory	27200	Income tax expense	33226
Prepaid expenses	2500	Accrued wages and salary	604860
Other expenses	14,762
Total current assets	556836	Total current liabilities	668086
Non current assets:		Long term liabilities:	90000
Property, plant, equipment	250000	Shareholders Equity:
Other non current assets	6250	Equity	55000
Total assets	813086	Total liabilities and shareholders equity	813086

Budgeted Cash Flow statement

Net income	(156286)
Increase in Accrued expenses	604860
Increase in tax payable	33226
Increase in inventory	(27200)
Net cash from operating activity	$454600
Purchase of Equipment	(84000)
Net cash flow from investing activity	370600
Increase in short term debt	30000
Increase in long term debt	90000
Owners’ equity	55000
Income tax paid	(33226)
Net cash flow from financing activity	512374
Cash flow at the beginning
Cash flow at the end	512374

Conclusion

According to the budget statement, the income for the first year is going to be negative which can be normal for new product development and introduction to the market. Going with the estimates, the company should have at least $512374 cash in hand and acquire short term and long term loans, while owners’ equity should be at least $55000. Moreover, our total assets combined are $813,086. The budgeted cash flow statement tells us about our cash flow, and the company’s net income is expected to be ($156286), and our cash flow from financing activities equals to $512,374 which is same as the cash flow at end because we didn’t have any cash flow at the beginning. To sum it up, we can do a profit analysis with our total spending calculated, without these numbers, analysis is hard to do so it is very much important for a business to have budget statements, balance sheets, cash flow statements in hand. There is always a need to plan ahead, analyze the data, assess the risks & act accordingly.