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The Operating and Cash Budgets

Background: The Business Plan

  • Marketing:

You have a segmentation analysis of the lifestyle variables for the adult learners market. The results support the need to invigorate and refuel with comfort food that is also nourishing. What better choice for adults than pizza? What will fill this need and differentiate Buzz-Time Pizza is the caffeinated tomato sauce.

  • Operations: You and a couple of friends will make, bake, and deliver made-to-order pizzas in two sizes. There is room in a garage for refrigeration, preparation tables, and a wood-fired oven. The sales manager will make all deliveries in his or her vehicle.
  • Financing: Clearly, this is a long-term investment. The three founders, who will each contribute an equal amount, have agreed not to draw a salary for 3 years. You have hired a sales manager and a part-time office manager.
  • Remember This

    In Week 3, the first two deliverables involve preparing the necessary financial budgets in order to satisfy creditors and control business operations.

    The Operating Budget

    Input the sales volume, as projected by your Field Sales managers. The sales manager has provided the following sales estimates and price points for the first quarter of 2020. Input these values in the worksheet labelled Operating Budget.

    Sales Estimates and Price Points for the First Quarter of 2020

      January February March Number of pizzas sold 40,000 42,500  45,000 Sales Price for Large: $10.50       Sales Price for Medium: $8.50      

    1. Input your forecast product mix, as provided by the Marketing Department. There is much debate as to the probable sales mix between the two sizes. Input a product mix of your choice (make sure these two add up to 100%).
    2. Input the efficiency rate for your direct labor, as projected by the VP of Manufacturing. Direct labor consists of your chef, Pepe, who has agreed to a low wage as long as cigarette and bathroom breaks are included. DO NOT CHANGE THIS LABOR RATE. However, you must calculate the chef's efficiency rate. Input your standard rate of how many minutes it will take to make one pizza from order to box.
    3. Input the sales commission, as provided by the VP of Sales and the department's fixed costs. Ingredient and material costs, based on quotes after an extensive request for proposal (RFP), are good for two years. DO NOT CHANGE THE DIRECT MATERIAL RATES. The only variable selling cost is a sales commission based on a percent of sales revenue. Input the percent you wish to pay your sales manager.
    4. Input the administrative fixed costs as provided by the CFO. Selling expenses include a fixed component for the sales manager's salary and car allowance for any company business use of their personal auto. Input the monthly salary you wish to pay for compensation.
    5. Calculate the break-even sales.
    6. Calculate sales volume needed to make $200,000 in net income.
    7. Remember This

    8. You are to look over this financial plan and make adjustments in the data you have input in order to obtain the most reasonable and not excessively optimistic results.

    The Cash Budget

    1. If needed, copy the sales from the first quarter operating budget. Ensure that the sales revenues for January through March is the same as that on the operating budget.
    2. Using an aging of the collection period, as provided by the credit manager, forecast cash receipts by month. Calculate total cash receipts for January through March. For each month's cash disbursements, you are to assume that half of the direct material payments are from the current month's purchases and half are from the prior month's purchases. All selling and administrative expenses are paid in the month incurred.
    3. Calculate the forecast direct material cash payments by month.
    4. Determine the timing of a capital expenditure. You are to decide in which month to invest a significant amount of cash in a facility expansion.
    5. Determine the timing and amount of financing. You are also to decide on the timing and amount of financing that will cover any month in which you do not meet the compensating cash balance requirement.

    At the end of the first quarter, management desires to have any new debt for this expansion paid off (meaning a 0 balance).

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