In this assignment, you need to produce a budget report for a business based on one of the three proposals you choose. This assignment includes preparing two budgets (a budgeted income statement and a cash budget) and a report based on the forecasted numbers from these two budgets. The case study is described in detail below. You (and your team) work in a boutique firm called Business Advisory Pty. Ltd., a business that provides strategic and financial advice to other businesses. Your role in the firm is that of a business consultant. To this end, you are often required to produce financial forecasts and budget reports for clients. Mr. James Hunter and Dr. Olivia Ng (Optometrist) are business partners who have approached your firm looking for business advice. Given the current global COVID-19 pandemic, business has been slow and so the clients would like to take this opportunity and take their business to the next level. Their business is an optometry business trading under the name i-Optometry. The business is a brick-and-mortar store located in Burwood and retails eyewear, that is, sunglasses and prescription glasses. They also provide optometry services to customers in the form of comprehensive eye-tests. As part of their business operations, i-Optometry retails the following types of eyewear: Sunglasses retail for $200 each. It costs $60 each and the business purchases them from a local supplier. Prescription glasses retail for $150 each. It costs $80 each to buy them from the same local supplier who provides the sunglasses. i-Optometry also provide comprehensive eye-tests to customers who wish to assess eye health. The selling price of one comprehensive eye-test is $75.
James suggests that selling prescription glasses does not produce enough margin. He has proposed that they focus on sunglasses sales and further increase the margin by changing the supplier. The new supplier will provide slightly inferior products but will be much cheaper than the current supplier. James would also like to introduce several other cost-cutting initiatives such as reducing wages of some staff, getting rid of some features on the insurance policy, and reducing utility costs by going green which could also improve public image.
Additional Notes: Note that for the purposes of the financial forecasts and budgets, you can assume all items are GST free. Due to COVID-19, i-Optometry is effectively shut down and the owners are planning to reopen on 1st January 2021. This effectively means year 2020 is a write-off and you can assume there to be no sales, costs, or purchases in December 2020.
your manager would like you and your team to complete the Cash Budget for the project your team has selected and for the period between January 2021 to December 2021 inclusive.
Chosen Project: Cost Management Strategy Cost of Project: $ 0 Cash Balance at 31 Dec 2020: $ 422,604 By switching suppliers, the unit cost to purchase sunglasses will drop by 30% while the unit cost of prescription glasses will remain the same. James would like to keep the selling price of sunglasses the same. Due to the slightly less well known branding of the glasses, James believes that sales volume for the sunglasses will fall by 20% for each month in 2021 compared to the corresponding month in 2019. (e.g. Jan 2021's growth/decline is based on Jan 2019, Feb 2021's growth/decline is based on Feb 2019 etc). James believes that the prescription glasses don't make enough margin and so he would like to increase the selling price on prescription glasses by 10%. James believes that due to the increase in selling price, prescription glasses sale volume will decrease by 10% for each month in 2021 compared to the corresponding month in 2019. As a result of the decrease in prescription glasses demand, James estimates the eye-test service volume will also decrease by 20% for each month in 2021 compared to the corresponding month in 2019. The selling price of eye-tests will remain the same. The catch with the new supplier is that there will be a more stringent credit term in purchases of inventory. All purchases with the new supplier are still on a credit basis, however, 90% of the amount needs to be settled in the same month of purchase with the remaining 10% settled one month later. For credit term in sales of glasses, the business plans to continue its instore credit policy for their customers. To further reduce costs, James would like to reduce the salary of some staff. Specifically, he would like to reduce the office staff's and sale assistants' salary by 10%. The business will also be implementing 'green' measures to reduce the utilities consumption of water, gas and electricity by 20%. James also believes the business insurance has been a waste of money as they have never needed to make a claim. He plans to change the insurance policy to reduce the annual premium by 50%. All these increases/decreases are relative to 2019 amounts. All other fixed costs will decrease by 10% based on 2019 amounts. After the 1st year of the new project, in 2022, both the service volume and sales volume are expcted to increase by 5% for each month in 2022 compared to the corresponding month in 2021. FactSheet - Data on 2019 Financial Year Feb-2019 193 Sales Volume - Sunglasses Sales Volume - Prescription glasses Service Volume - No. of Eye-tests Jan-2019 184 89 81 Mar-2019 168 99 90 Apr-2019 179 86 78 May-2019 169 97 88 Jun-2019 222 151 137 Jul-2019 213 144 131 Aug-2019 184 116 105 Sep-2019 134 105 95 Oct-2019 164 99 90 Nov-2019 179 132 120 Dec-2019 192 139 126 94 85 Selling Price - Sunglasses Cost Price - Sunglasses $ $ 200.00 60.00 Selling Price - Prescription glasses Cost Price - Prescription glasses $ $ 150.00 80.00 Service Revenue per eye-test $ 75.00 Number of Sale Assistants: Wage Rate per Employee per Month 2 4,000 $ Number of Office Staff: Wage Rate per Employee per Month 1 4,500 $ Number of Optometrists Wage Rate per Employee per Month 2 6,500 $ Additional Information: Both James and Olivia are owners within the business and each of them draws an amount of $1879 per month. Each owner plans on increasing the drawings to $3758 per month starting from January of 2021. As the manager, James keeps a close eye on inventory management and would like to always maintain a monthly ending inventory requirement of 30% of next month's sales. You can assume the beginning inventory for Jan 2021 to be units for both sunglasses and prescription glasses. All purchases of inventory with the current supplier are on a credit basis, with 70% of the amount settled in the same month of purchase and the remaining 30% settled one month after the month of purchase. You can assume that all credit amounts for purchase of inventory prior to January 2021 have been settled. The business typically will have 80% of their sales of sunglasses and prescription glasses as cash, with the remaining 20% on credit. Of the credit sales, 70% is collected in the month of sales, 20% is collected one month after the sales, and 10% is collected two months after the sales. You can assume that all credit amounts for sale of inventory prior to January 2021 have been settled. All customers coming in for an eye-test pay for the service in cash 100% of the time. The business has the following non-current assets: In 2019, the business purchased specialised optometry equipment to provide comprehensive eye-tests. The total cost of equipment is $13800 and it is expected to last 5 years. Other office equipment has a total cost of $30720 and depreciates at 20% per annum. Shop fittings were originally purchased at $65520 and depreciate at 10% per annum. All non-current assets have $0 residual value and are depreciated using the straight-line method of depreciation. Other Fixed Costs: Marketing expense of $960 per annum is paid evenly across 12 months. $3120 of general business Insurance is paid in July every year. This insurance covers the period 1st Jan to 31st Dec every year. (100% office) Bank fees works out to be $78 per month and are paid at the start of each quarter. On average, the office supplies are purchased, paid and expensed every month to the amount of $110. General council rates are $852 per year and are usually paid in December every year. The rates cover the period 1st Jan to 31st Dec every year. (50% store; 50% office) Rent is paid at the start of each quarter and works out to be $6470 per month. (80% store; 20% office) Water, gas and electricity are combined under utility expense which adds up to $516 per quarter and is usually paid at the end of each quarter. (75% store; 25% office) *Note: Quarter 1 runs from 1 Jan-31 Mar; Quarter 2 runs from 1 Apr - 30 Jun; Quarter 3 runs from 1 Jul - 30 Sep; Quarter 4 runs from 1 Oct - 31 Dec. CASH BUDGET Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 TOTAL OPENING CASH BALANCE CASH INFLOWS: TOTAL CASH AVAILABLE: CASH OUTFLOWS CLOSING CASH BALANCE
