Frenchies: Creating and Using a Master Budget BACKGROUND Frenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. Because of the popularity of its brand, it has also opened a small caf for walk-in business. In order to maintain its high quality standard, Frenchies produces only three products: breakfast muffins, fresh bread, and chocolate chip cookies. Although business has been good in the past few years, a lucky contact with a large chain has recently allowed it to expand its brand out of the local region. Growth has been high since the new contract went into effect. Andy Griff, the chief executive officer (CEO) and founder, has arranged a meeting with a venture capital firm next week. Hopefully the meeting will result in the sale of some of Frenchies stock and an opportunity to establish a significant line of credit with the venture capital firm. These extra funds, if Andy can secure them, should provide sufficient money to meet Frenchies growth targets for the next few years. The venture capital firm's assessment team has asked Andy to provide a quarterly master budget for the year that just began, complete with pro forma financial statements, at the meeting. They have expressed special interest in Frenchies earnings per share (EPS), cash flow from operations, and profit margins, indicating that good numbers in these areas will be essential for final approval. In typical managerial style, Andy immediately assigned the task of creating the budget to Nicole Quarterman, who has just been hired as Frenchies controller. Since this project is her first assignment, Nicole started by making appointments with each of the divisional managers to gather information for the budget and also to learn more about the company. PARTI: CREATING THE BUDGET MEETINGS WITH DIVISIONAL MANAGERS MEETING WITH THE SALES DEPARTMENT Walking down the hallway towards the office of Jeff Barza, the sales manager, Nicole read the results for last quarter which ended on December 31, 2018. Frenchies sold 45,000 one-dozen packages of muffins for $5.50 each, 65,000 one-dozen packages of cookies for $4.75 each, and 85,000 one-dozen loaves of bread for $5.25 each. When Nicole got to Jeff's office, he motioned her in to have a seat. "Is it time for our meeting already?" he asked. "Where does the day go?" "Who knows? It seems like one minute I'm having my morning muffin and the next I'm saying good- bye to everyone," Nicole said with a sigh. "There's never time to get everything done. And now I get to do the budget." Jeff started to laugh. Thanks," she muttered. I knew I could count on your support." "I'm sorry. I just have to laugh at the amount of time you are going to put into something that isn't really used anyway, except for setting bonuses, of course. "Not really used? I don't know how it's been around here in the past, but this year, at least, the budget will prove to be a valuable tool." Nicole waved away Jeff's retort. Anyway, one way or another ! have to create one and, as you know, the process always starts with projected sales. Do you have a copy of last quarter's results?" "Yes, right here somewhere," Jeff said, shuffling papers around on his desk. "Got it!" he exclaimed, waving it gently as he pulled it from under a stack of other papers. "Now, what do you want to know exactly?" "Well, Andy thinks that since we have established a strong following both locally and in our new markets, we can raise our prices slightly next year without a sharp drop in sales. He was thinking $6.00 for muffins, $5.25 for cookies, and $5.75 for bread. What do you think?" I agree," Jeff said eagerly. "I've been pushing that for years. Of course, I think that sales will drop some in the first quarter of next year. They always drop off a bit after the holidays anyway, but with the increase in sales price ... I'd say a 20 percent drop from the fourth quarter results we have here." He looked up Page 1 V fx 2 A B D E F G H . I J K L M N O Q R Case Data 1 2 Sales Information: Estimated % drop: 20% Estimated Growth: 5% Estimated Additional Holiday Increase: 15% Sales: Muffins Cookies Bread Last Year Q4 45,000 65,000 85,000 Current Year Q1 Q2 Q3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Q4 Next Year 01 Q2 Oso Sales Price/Item: $6.00 $5.25 $5.75 Collection Information: E Frenchies Start - Saved fx 2 E F G H J L M Sales Budget 1 2 3 Quarter 02 Total 2020 Q1 Q3 04 Muffins Budgeted Sales Selling price per dozen Total Sales Revenue from Muffins 10 Cookies Budgeted Sales Selling price per dozen Total Sales Revenue for Cookies 12 13 14 15 16 10 17 18 19 20 21 22 Bread Budgeted Sales Selling price per loaf Total Sales Revenue for Bread Total Sales Revenue Schedule of Cash Collections Collections in Quarter 01 02 03 04 Total 2020 23 24 25 26 27 28 29 30 31 Collections from last year Q1 Sales Q2 Sales Q3 Sales Q4 Sales Total Cash Collections $0 $0 $0 $0 33 34 35 Frenchies Start - Saved fx 4 AB D E F G H 1 Production Budget 1 2 3 4 Q1 Q2 Q3 Q4 Total LO Muffins Sales Add ending inventory Less beginning inventory Required production 6 7 8 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Frenchies: Creating and Using a Master Budget BACKGROUND Frenchies is a medium-sized regional bakery that specializes in providing orders to grocery and convenience stores. Because of the popularity of its brand, it has also opened a small caf for walk-in business. In order to maintain its high quality standard, Frenchies produces only three products: breakfast muffins, fresh bread, and chocolate chip cookies. Although business has been good in the past few years, a lucky contact with a large chain has recently allowed it to expand its brand out of the local region. Growth has been high since the new contract went into effect. Andy Griff, the chief executive officer (CEO) and founder, has arranged a meeting with a venture capital firm next week. Hopefully the meeting will result in the sale of some of Frenchies stock and an opportunity to establish a significant line of credit with the venture capital firm. These extra funds, if Andy can secure them, should provide sufficient money to meet Frenchies growth targets for the next few years. The venture capital firm's assessment team has asked Andy to provide a quarterly master budget for the year that just began, complete with pro forma financial statements, at the meeting. They have expressed special interest in Frenchies earnings per share (EPS), cash flow from operations, and profit margins, indicating that good numbers in these areas will be essential for final approval. In typical managerial style, Andy immediately assigned the task of creating the budget to Nicole Quarterman, who has just been hired as Frenchies controller. Since this project is her first assignment, Nicole started by making appointments with each of the divisional managers to gather information for the budget and also to learn more about the company. PARTI: CREATING THE BUDGET MEETINGS WITH DIVISIONAL MANAGERS MEETING WITH THE SALES DEPARTMENT Walking down the hallway towards the office of Jeff Barza, the sales manager, Nicole read the results for last quarter which ended on December 31, 2018. Frenchies sold 45,000 one-dozen packages of muffins for $5.50 each, 65,000 one-dozen packages of cookies for $4.75 each, and 85,000 one-dozen loaves of bread for $5.25 each. When Nicole got to Jeff's office, he motioned her in to have a seat. "Is it time for our meeting already?" he asked. "Where does the day go?" "Who knows? It seems like one minute I'm having my morning muffin and the next I'm saying good- bye to everyone," Nicole said with a sigh. "There's never time to get everything done. And now I get to do the budget." Jeff started to laugh. Thanks," she muttered. I knew I could count on your support." "I'm sorry. I just have to laugh at the amount of time you are going to put into something that isn't really used anyway, except for setting bonuses, of course. "Not really used? I don't know how it's been around here in the past, but this year, at least, the budget will prove to be a valuable tool." Nicole waved away Jeff's retort. Anyway, one way or another ! have to create one and, as you know, the process always starts with projected sales. Do you have a copy of last quarter's results?" "Yes, right here somewhere," Jeff said, shuffling papers around on his desk. "Got it!" he exclaimed, waving it gently as he pulled it from under a stack of other papers. "Now, what do you want to know exactly?" "Well, Andy thinks that since we have established a strong following both locally and in our new markets, we can raise our prices slightly next year without a sharp drop in sales. He was thinking $6.00 for muffins, $5.25 for cookies, and $5.75 for bread. What do you think?" I agree," Jeff said eagerly. "I've been pushing that for years. Of course, I think that sales will drop some in the first quarter of next year. They always drop off a bit after the holidays anyway, but with the increase in sales price ... I'd say a 20 percent drop from the fourth quarter results we have here." He looked up Page 1 V fx 2 A B D E F G H . I J K L M N O Q R Case Data 1 2 Sales Information: Estimated % drop: 20% Estimated Growth: 5% Estimated Additional Holiday Increase: 15% Sales: Muffins Cookies Bread Last Year Q4 45,000 65,000 85,000 Current Year Q1 Q2 Q3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Q4 Next Year 01 Q2 Oso Sales Price/Item: $6.00 $5.25 $5.75 Collection Information: E Frenchies Start - Saved fx 2 E F G H J L M Sales Budget 1 2 3 Quarter 02 Total 2020 Q1 Q3 04 Muffins Budgeted Sales Selling price per dozen Total Sales Revenue from Muffins 10 Cookies Budgeted Sales Selling price per dozen Total Sales Revenue for Cookies 12 13 14 15 16 10 17 18 19 20 21 22 Bread Budgeted Sales Selling price per loaf Total Sales Revenue for Bread Total Sales Revenue Schedule of Cash Collections Collections in Quarter 01 02 03 04 Total 2020 23 24 25 26 27 28 29 30 31 Collections from last year Q1 Sales Q2 Sales Q3 Sales Q4 Sales Total Cash Collections $0 $0 $0 $0 33 34 35 Frenchies Start - Saved fx 4 AB D E F G H 1 Production Budget 1 2 3 4 Q1 Q2 Q3 Q4 Total LO Muffins Sales Add ending inventory Less beginning inventory Required production 6 7 8 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25