The Happy-Happy Firework Company is a producer of Fireworks for various outlets. These include large retailers and also small independent retailers. Since 2010, the firm has been successful at producing fireworks a quality which is known within the industry and has developed a relationship with a number of very large retailers who provide regular orders at key times for the firm. The senior management team is very aware of the power which these large customers possess and is keen to develop ways to build on these relations with the aim of reducing the cash flow volatility which the firms cash flow exhibit.

Recently the firm has become aware that competitors are pricing their products in relation to The Happy-Happy Firework Company’s prices with the aim of undermining their customer relationships, offering cheaper fireworks, but of much lower quality, which is important to the safety of the customers and staff.

The Happy-Happy Firework Company’s management are keen to review the processes of planning, control and cash flow management with the aim of managing this threat more effectively.

The table below shows the cash budget for the next six months.

Cash flow budget for The Happy-Happy Firework Company from August 2016 to January 2017

The Managing Director after reading the cash budget is concerned about the next year’s business activity in relation to the prices which they will be able to sell the fireworks to the retailers.

The finance officer also provides the following supplementary information for the period ending 30th June 2016 (In relation to last periods Accounting Profit).

The firm is planning a large amount of fixed capital expenditure to help the production manager, better manage the demand and production in certain key periods for the firm. These include, more machine intensive production facilities, which can not only produce the fireworks at a much quicker rate, but also increase the variety of product while maintain their quality. The cost of the machines is roughly, £3.2m and this amount is not included in the cash flow budget.

Required:

a) The implications of the projected cash budget and suggest possible risks and considerations in terms of these projections.

b) An analysis of the source of the reported variances from last year’s accounting period (2016). Using practical evidence suggest methods by which these could be controlled more effectively

c) How the firm can control the budgeting process more robustly and suggest alternative ways of the management controlling the possible future variances which may occur.