Years 2 and 3 – Budgeting and Cash Flow

The market is growing. New properties are being built in expensive parts of town. Businesses and government offices are relocating to the city in large numbers. Many clients have said they would buy more furniture if it was available. Sales volume can increase by 50%. That will be the target for next year.

• The existing production facility equipment operates at only 60% capacity. There is no need for extra equipment.
• Extra storage of raw materials will be required, estimated at 10% increase on current levels.
• Two extra skilled staff will be required—one in production and a new position in quality control.
• Refresher training in workplace safety will be required for all production staff due to increasing accident rate which threatens productivity.
• Staff are available through internal promotion and a government supported apprenticeship scheme to replace promoted workers at a low cost.
• Assumed that current management capacity is adequate.
• Current owner/manager control level will be maintained.

• Wages will rise by the national inflation figure of 5%.
• Raw materials will stay at the same cost.
• Storage will rise by 3%.
• No additional machinery required.
• Assume other costs rise in line with inflation (i.e. 5%).

• The business has enough cash to fund about half of the increase in costs.
• Sales prices will rise by 2% on average only to make products more competitive. Other producers are increasing by the inflation rate of 5%.
• Unable to negotiate lower prices for raw material and storage because the quantity purchased is not large enough to benefit from big quantity price reductions.
• Costs of printing advertising leaflets and newspaper advertisements will be used to pay for online advertising services from a local marketing consultancy.
• Overdraft facilities are available from the bank, but the price is high (20% per year).
• A loan secured against the production equipment is available at 16% interest per year for 5 years.