Financial Planning and Budgeting Strategies for Limpty Ltd Case Study

Introduction: Break-Even Analysis and Cost Control in Limpty Ltd

Limpty Ltd expects its trade receivable to equal two months' worth of sales income and each month, the business aims to have enough inventories to satisfy expected client demand. This prevents them from running out of iPads and disturbing their clients but the maker of the iPad gives them a credit for one month. This entitles them to a one-month payment grace period from the manufacturer and this indicates that they anticipate their consumers to make payments for their iPad purchases throughout two months. The total amount of money due to Limpty Ltd by its clients is represented by receivables for trade. Wholesaler Limpty Ltd is taking care of tax responsibilities, supplier payments, as well as and the acquisition of extra product storage while maintaining its inventory and expenditures to guarantee it can satisfy consumer demand. The business intends to keep selling the new iPads at the same pricing as the previous model to preserve its consumer base.

Main body

a) Explanation of budgeting and steps in the budget-setting process

A budget is a plan of action that details anticipated earnings and outlays for a predetermined time frame, usually a month, quarter, or year. The process may also be used as a tool for budgeting, efficient use of resources, and reaching financial objectives (Cescon et al. 2019). Individuals, companies, organizations, and governments use budgets to keep spending under control, conserve capital, make investments, and make educated financial choices.

• Define Financial Goals and Objectives: it is crucial to define financial goals and objectives clearly. These might involve putting money aside for a trip, paying off debt, launching a company, or making arrangements for retirement and the process of establishing a budget will be guided by clearly stated goals.
• Establish a Timeframe: Choose the time frame for the budget and depending on demands and the structure of funds, choose from common durations like every month, quarter, or yearly.
• Estimate income: List and sum all of the sources of revenue anticipated for the budget term. This covers both usual earnings and any supplementary or irregular revenue, helping to verify that income predictions are accurate and reasonable (Petera and Šoljaková, 2020).
• Prioritize Expenses: Decide what costs are mandatory and unassailable (basic living expenditures) and what costs are optional (eating out, entertainment). Individuals may devote money to the most critical financial goals by setting priorities.
• Create the Budget: The objective is to make sure that revenue covers all costs by deducting estimated expenses from projected income (Schaltegger et al. 2022). In addition, if there is a surplus, think about investing it; if there is a shortfall, may need to cut back on consumption or look for methods to boost revenue.

b) The connections between the budgets

As each budget contributes to the overall budgetary planning and achievement of the company, they are all connected and tied to one another.

• Sales Budget: Usually, the budgeting process begins with the sales budget and the use of historical data, analysis of the market, and sales techniques, it predicts the anticipated sales income for a certain time. The Direct Employment Budget and the Budget for the Purchase of Supplies of Raw Materials are both built upon the Sales Budget.
• Overhead Budget: The amount of activity anticipated in the spending plan for sales has an impact on the overhead budget. Greater overhead expenses may result from greater production or sales volumes. The estimated indirect costs of operating the firm, which iincluderent, utilities, insurance coverage, and operational expenditures, are listed in the overrun budgeting.
• Capital exExpenditureudget: The Capital Investment Budget accounts for sizable expenditures on assets like equipment, cars, or buildings (Bento et al. 2018). Moreover, it is impacted by the development and expansion plans laid out in the sales budget, and if sales estimates show higher demand, the company may need to invest in more manufacturing facilities or equipment to satisfy that need.
• Direct labour Budget: The labour expenses necessary to produce the items or services specified in the sales budget are estimated in the direct labour budget. The amount of labour required is influenced by the quantity of units to be manufactured or the products to be provided, which is why it depends on the spending plan for sales.
• Raw material purchase Budget: The Sales Budget and the Budget for Raw Material Purchases are closely related and they estimate the amount and price of raw materials required to fulfil the manufacturing demands specified in the marketing budget.

c) Benefits and drawbacks of Limpty Ltd by using break-even analysis

An accounting method called break-even analysis is implemented to determine when a company's total income and expenditures equal each other and cause a loss. Although break-even evaluation can be a helpful tool for comprehending the financial circumstances surrounding a company like Limpty Ltd, it ought to be employed in conjunction with other financial and strategic assessments to offer a more complete picture of the business's accomplishments and possible risk (Jasim and Raewf, 2020). When analyzing the outcomes, it's also essential to be aware of its limits as well as the unique conditions and company complications.

• Benefits: Limpty Ltd. uses break-even analysis to establish the volume of revenues or output required to cover expenditure, which clarifies when the business will begin to turn a profit. The Limpty Ltd may alter these factors to attain targeted profit levels using the decision-making tool, which also helps in determining sales objectives, pricing tactics, and production levels. The firm may assess the effects of changes in revenues or expenses on profitability by determining the point at which it reaches break-even (Cockcroft and Russell, 2018). Limpty Ltd is capable of assessing the financial risk involved with its activities thanks to the break-even analysis.
• Limitations  Break-even analysis is predicated on the simplification of assumptions, such as the constancy of fixed expenses. In actuality, prices might alter because of things like inflation or shifting levels of manufacturing. Businesses with straightforward pricing structures and single items are more suited for this study. Technology can be less helpful for businesses with complicated operations and many different product lines (Asay et al. 2022). According to the inherent uncertainty of income and costs, break-even calculations may be less precise for extremely small enterprises or entrepreneurs with erratic cash flows.

d) Using the standard costing method to assist the management team in cost control and performance measurement for Limpty Ltd

The management team of Limpty Ltd can better control expenditures and gauge performance by using a standard budgeting system.

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• Cost Benchmarking: Setting predefined cost norms for goods, labour, and overhead is known as standard costing. These guidelines operate as a yardstick by which to measure real expenses. Whenever real expenses are higher than expected, the administration is informed and giallowedo look into the situation and make the necessary corrections.
• Variance Analysis: The variance analysis process, which compares real costs spent with standard costs, is made easier by standard costing. Variations can be positive (costs are lower than anticipated) or negative (costs are greater than anticipated) (Yoon, 2020). This makes it possible to quickly take corrective action by identifying cost differences and their underlying causes.
• Efficiency Assessment: The process is possible to assess the impact of manufacturing using standard costing. As cited by Chukwudi et al. (2018), management can evaluate labour and production efficiency by comparing actual hours or units with the standard hours or units needed to manufacture a product. Optimizing resource allocation and staff productivity is made possible by the aforementioned data.
• Product Profitability Analysis: The profitability of any product is ascertained through standard costing by contrasting standard costs with real revenues. This might help in determining which goods are more profitable for the business and which may require price or cost management modifications.

e) Adopting the standard costing approach to manage its expenses and monitor performance, Limpty Ltd. may run into issues

• Inaccurate Standards: Whenever establishing and utilizing the conventional pricing method, Limpty Ltd may run into several difficulties and difficulties, even though it may be a useful instrument for cost management and achievement measurement. As opined by Farooq and De Villiers (2018), the precision and efficacy of cost oversight and performance monitoring may be impacted by these problems. These possible issues are listed below:
• Variance Analysis Complexity: Setting precise standard costs might be difficult and standards may not accurately reflect the real cost of manufacturing if they are too broadly defined or are not regularly modified to account for advancements in technology, marketplace circumstances, or supplier price. Applying standard costing consistently to all of Limpty Ltd's goods may not capture the subtleties of each product's pricing structure if the company has a diversified product mix with variable manufacturing methods and expenses.
• Volume Fluctuations: Variance analysis, an important part of conventional pricing, can get too complicated. Additionally, it might take a lot of time and effort to monitor and analyze multiple deviations for various cost elements, such as materials, labour, and overhead (Chen et al. 2019). This can result in information overwhelm and standard costing counts on a constant volume of output or sales. In truth, seasonality or fluctuations in client demand can cause production numbers to fluctuate. These variations might skew cost variances, which could render it challenging to evaluate real effectiveness or efficiency concerns.

Limpty Ltd should think about routinely assessing and revising its established costs, employing adaptable spending plans that take volume swings into account, and encouraging a culture of continual improvement instead of implementing strict cost control to offset these issues.

f) Cash budget for Limpty Ltd for the next six months

Figure 1: Cash budget

Determine the inflows and outflows of money for every single month for the six months to come, which will expire on June 30, 2022, to develop a spending plan for Limpty Ltd. Credit sales, trade accounts payable, running costs, the acquisition of additional warehouse space in April, and the payment of taxes at the end of March will all be taken into account. Limpty Ltd estimates trade payables to equal two months' worth of earnings from sales. Utilize the Credit Sales information to determine this once a month. The running Expenses section will be filled with the running expenditures for each of the months (Jan: £3,000, Feb: £3,000, Mar: £5,000, Apr: £6,000, May: £6,000, Jun: £6,000). Use the total amount of current assets (£157,000) from the declaration of financial health as the starting balance for January.

Based on credit sales, Limpty Ltd projections trade invoices for January and February total £50,000 each since those two months' sales are represented by those amounts. Trade payables are anticipated to be nil as of March. The initial balance for January is £72,000, which is the same as the final total for December 2021. The closing balance from the prior month serves as the opening balance for succeeding months. The closing balance, which reflects how much money is available at the end of each month, is computed by comparing the amount of cash flowing to the beginning balance (Alles et al. 2021). This cash budget shows the anticipated amount of cash available at the end of each month and gives a clear picture of Limpty Ltd's flow of cash for the next six months. The business enables the business to plan its financial capabilities and make sure it has enough money to cover its liabilities and costs.

Conclusion

Receivables for trade are the entire sum of money owed to Limpty Ltd by its clients. While managing its inventory and expenses to ensure it can meet consumer demand, wholesaler Limpty Ltd is taking into consideration tax obligations, supplier payments, as well as the procurement of additional product storage. By subtracting expected expenditures from projected income, the goal is to ensure that the revenue covers all costs. Additionally, if there is a surplus, look into using it; if there is a shortage, you might need to reduce your expenditure or search for ways to increase your income. Each budget is linked to the others since they all play a part in the company's overall fiscal strategy and success.

References

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