Task three Consequences of Poorly Managed Budgets (P6, M4, D3)

Paul has been very grateful for the support you have given him. He is surprised at the difficulties that have
been experienced at Headliners Hair Salon. He is keen for more information and have asked you to provide
further detail on the causes of the problems at the salon and how you feel these problems could have been
overcome. Add the following to the information pack you prepared in task two;

1. Look through the budget, break down the elements of the budget, determine why the problems exist (P6)
and what issues this will create for the hairdressers. (M4)

2. Evaluate these problems, make final judgments on what the problems are and give some
recommendations as to what they can do to try and solve the problem. (D3)

Sales Budget for Headliners Hair Salon

Month

Monthly budget

Cumulative
budget

Actual monthly

Actual
cumulative

Cumulative
Variance

January

10,000

10,000

8,500

8,500

(1500)

February

10,000

20,000

9,000

17,500

(2500)

March

12,000

32,000

10,000

27,500

(4500)

April

12,500

44,500

10,500

38,000

(6500)

May

13,000

57,500

11,500

49,500

(8000)

June

15,000

72,000

13,000

62,500

(9500)

Total

72,000

62,500

Cost budget for Headliners Hair Salon (see below for breakdown)

Month

Monthly budget

Cumulative
Budget

Actual monthly

Actual
Cumulative

Cumulative
Variance

January

11,250

11,250

11,880

11,880

(630)

February

6,250

17,250

6,380

18,260

(1010)

March

5,750

23,250

6,880

25,140

(1890)

April

8,250

31,500

8,880

34,020

(2520)

May

7,950

39,450

8,080

42,100

(2650)

June

7,450

46,900

8,080

50,180

(3280)

Total

46,900

50,180

Breakdown of cost budget for Headliners Hair Salon

Month

purchas
es

Wages

Rent
and
rates

Januar
y

4500

1000

400

Februa
ry

3000

1000

400

March

4000

1000

April

4500

May

Light
and
Heat

Advertisi
ng

Insuranc
es

Equipme
nt

Vehicle Motor
s
expens
es

Total

250

400

5000

250

80

11880

250

400

500

250

80

6380

400

250

400

500

250

80

6880

1000

400

250

400

2000

250

80

8880

5000

1000

400

250

400

200

250

80

8080

June

5500

1000

400

250

400

200

250

80

8080

Total

9000

6000

2400

1500

2400

8,400

1500

480

50180

500

500

1000

Actual costs

Purchases were 4500, 3000, 4000, 4500, 5000, 5500

Wages, rent and rates, lights and heat and vehicle costs were as expected

Advertising was 250 per month

Insurance was 400 per month

Motor expenses were cheaper than expected at 80 per month

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Consequences of Poorly Managed Budgets

There are many detrimental effects that poorly managed budgets could have on a business,
regardless of their business scale or industry. Below, I will analyse the budgets and actual monthly
finances of Headliners Hair Salon and indicate and issues in their finances.
The first issue that is clearly apparent is that Headliners forecasted budget is greater than the actual
inflows month-on-month. This is an issue as this means the company is receiving less revenue than
forecasted, thus having less funds in the company account and in turn, less profits made.
The budget for costs that Headliners have forecasted is also inaccurate, as the actual expenditure is
greater than that of the forecasted figures. This will result in a decreased profit due to more costs
having to be paid from the business inflows. This will have a majorly negative impact on the
business as forecasting more profits than what will actually be made will lead to disappointment
and could result in slower business development than planned.
Due to the poor financial forecasting, the profit margin over the months of January to June have
decreased by more than 50% of what was initially budgeted. This is a huge problem for the
business as plans may be put into place to use the profits for re-investments to grow the business.
In the month of January, Headliners may struggle due to the greater amount of expenditure than
business inflow. This is due to the fact that the company would have just started up at this point,
where start-up investments have to be made. In addition, that this point, Headliners would not have
made much of a market presence due to the small timeframe of business operation.
During June, in the sixth month of operation, steady profits will be able to be made as the inflows
are a good amount greater than the expenditures of the business. This means that developments to
the business can start to be made and allow the business to grow.
There is a trend month-on-month of increased revenues, which is positive for the business as you
can see that they are making more sales, exhibiting the frequency of customers to the salon. This
suggests that the business is getting more recognised in the region, and is receiving a greater share
of the market each month.
Having lower potential spendings due to decreased costs, and lower revenues means that
Headliners overall development and productivity would be far slower. Milestones set by
management would not be met at their required dates, hence meaning that Pauls dream of growing
the business would take longer than he envisions.
On the contrary, the business actually is relatively profitable in most months. In the first two
quarters of the year shown above, only in the months of January and March the business generates
fewer sales than costs. This means that in only two months of the two quarters,
For Paul to increase his budgeting and financing efficiency, there are some measures that he should
take to improve. Firstly, it may be of greater efficiency for Paul to budget his salons sales less than
he believes he can sell. This is so that he can ensure that he will at least have satisfactory funds to
cover his costs. As a result, Paul should use a source of finance such as overdrafts to fund the costs
for these months.
As the Headliners hair salon is still a small business, there is not enough budget to allow Paul to
hire professional staff who can better evaluate the potential costs and sales. As a result, it may be a
good option for Paul to outsource his budgeting, finances and audits to maximise accuracy, and
potentially saving money to make profit. It is important for businesses to forecast finances correctly
to ensure that profits can be determined early. Having a professional, such as an accountant,
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perform these tasks can increase the accuracy, and in turn help better determine profits. This will
better prepare the business for financial losses and indicate where Headliners may need to seek
extra finances.
As Paul is still in his first few months of business operation, it is important that he maintains a
satisfactory cash flow for his business. Some months may require more expenditures than others.
He should ensure that he seeks enough finances not just to cover the start-up and immediate costs,
but enough finance to ensure that he has contingency plans for possible losses. It is crucial that he
has enough money in the bank to cover costs to avoid bankruptcy, or possibly foreclosure.
Should Paul begin to generate profits, he should make sure that he retains profits for future
spending for the business, before extracting these funds from the business. It is important that he
has money in the business account again for future costs and issues that may arise. He should only
begin to extract money from the business when steady profits are generated.

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