Budget

For this assignment you will create a financial business plan that will tie together an income statement, a purchases budget, a cash budget, and a pro forma balance sheet. The first step is to produce the income statement.

Income Statement
To complete this first step, we need to project monthly sales and expenses. This requires estimates of monthly sales volume, selling price, and cost behaviors. The following are the estimates you should use in developing your model.

Annual sales: 18,000 pizzas

Monthly sales pattern:

January 8% April 10.5% July 4% October 10.5%
February 10% May 7% August 6% November 9%
March 11% June 6% September 9.5% December 8.5%

Selling Price: $11.50 per pizza

Annual cost behaviors:
Fixed Variable (per pizza)
Ingredients $ 0 $3.00
Salaries & wages 48,000 .50
Advertising 3,000 .00
Depreciation 9,000 .00
Utilities 3,000 .25
Supplies 0 .15
Local taxes 4,200 .00
Insurance 2,400 .00
Miscellaneous 2,400 .10

The above fixed expenses are for the entire year. Assume fixed expenses are incurred evenly throughout the year.

Your assignment is to produce a computer spreadsheet that will generate monthly income statements for the entire year. The spreadsheet should allow for easy manipulation of annual volume, selling price, and changes in cost behavior.

Purchases budget, balance sheet, and cash budget
After completing the projected income statement, you are now able to prepare the purchases budget, cash budget, and balance sheet. The purchasing budget is used to plan raw material (ingredient) purchases. The purpose of the cash budget is to predict our cash position at the end of each period, thus allowing us to plan short-term borrowing if it is needed. We create the cash budget by determining the amount and timing of cash receipts and cash payments. To do this, we make certain assumptions about expected cash flow patterns. The following assumptions apply to the Pizza Shoppe:

1. Revenues are collected in the month of sale.
2. Ingredients purchased are paid as follows:
? Forty percent in the month of purchase.
? Sixty percent in the month following the purchase.
3. Our policy is to have enough ingredients on hand at the end of each month to satisfy 20% of the next month's cost of ingredients.
4. Salaries and wages are paid as follows:
? Seventy-five percent in the month incurred.
? Twenty-five percent in the following month.
5. Advertising is paid in the month incurred.
6. Utilities are paid in the month after it's incurred.
7. Supplies are purchased and paid in the month before use.
8. Insurance is paid 50% in January and 50% in July.
9. The local taxes are paid 50% in April and 50% in October.
10. All miscellaneous expenses are paid in the month after they are incurred.
11. The long-term loan carries a 12% interest rate.
12. The owner withdraws $3,000 per month.

In addition to the amount and timing of cash flows, we need to know what our initial financial position is. Financial position is captured by the balance sheet. The balance sheet is a listing of our resources (assets), our obligations (liabilities), and the net worth of the business (owner's equity). The balance sheet for the Pizza Shoppe on January 1, just after we purchase it, is as follows:

ASSETS LIABILITIES
Cash $ 100 Accounts Payable $ 0
Ingredients inventory 700 Salaries & Wages Payable 0
Supplies inventory 216 Utilities payable 500
Prepaid taxes 0 Taxes payable 0
Prepaid insurance 0 Misc. expenses payable 0
Equipment & fixtures 30,000 Short-term bank loan 0
Less: Accumulated deprec. 0 Long-term bank loan 90,000
Building 60,000 Total Liabilities $ 90,500
Less: Accumulated deprec. 0
Land 29,500 OWNERS EQUITY $ 30,016
Total Assets $120,516
TOTAL LIABILITIES & O.E. $120,516