Table of Contents
Introduction
This report encompasses the forecasted budget for next year for the Refrigerated Goods division of Clark Casc Logistics plc. It initiates with an overview of the current situation, illustrating the essence of budgeting and the approach utilized for the forecasting of the budget for the year 2022-2023. Furthermore, this report instigates the financial feasibility of the new depot. This entails the investment appraisal of the new depot and the methodology used to recommend the commencement of the project as per the proposed timeline.
As per the current records, Clark Casc Logistics plc generated a profit of £ 32 million last year and has reached around £ 18 million profit in the initial six months of the current fiscal year. This demonstrates the benefits being reaped from the appropriate budgeting done before. Considering the Refrigerated goods division, the department overachieved its budgeted revenue by 4.74%. Moreover, the department also overperformed in the profit segment by almost 17%. One more good perspective on this is that the Refrigerated Goods division contributes around 16.7% to the overall profit of the company. All of this has been catered to due to a good budgeting approach taken by our department and our team for being focused on achieving their targets as per the budget. Nonetheless, there is more to the performance of the company and the forecasts that have been budgeted in this report. Therefore, this report expands on the subsequent matters of the budget that have been prepared to utilize the historical trend and records, and the current business environment, policies, and insights from other departments.
Budgeting Approach
As can be observed, the results of budgeting are fundamental to any business. Therefore, this report highlights the significance of budgeting before moving forward. Budgeting can be defined as a financial plan that is developed to illustrate the future potential and forecasts for a business to develop strategies to attain the desired objectives and mitigate uncertainties and risks (Bartocci, Ebdon, & Grossi, 2022). In simple words, it is a quantitative blueprint showcasing the forecasts for revenues and expenses of a company that can be extracted using various methodologies involving historical information, business environment analysis, industry analysis, risks, etc. This may portray the fundamental of budgeting in terms of planning and avoiding risks to make the operations of a business run smoothly to achieve the determined goals (Kagan, 2022). Thereby, it helps in planning the objectives of a company through SMART goals and utilizing efficient ways to mitigate risks and avoid unnecessary expenses. This can help the organization in discovering new profitable opportunities just like our company did with the new Depot. Consequently, it can be deemed that budgeting helps with the planning, evaluation, coordination, delegation, and motivation to achieve the desired results. Even though the Refrigerator goods division has achieved more than its budgeted revenue, we will further consider making a new budget deriving as close to the real estimates as possible (İpek, 2018). For this purpose, we will be discussing the various budgeting approaches and elaborating on the ideal for the department. The different types of budgeting methodologies are as follows:
- Incremental Budgeting
- Zero-based Budgeting
- Activity-based Budgeting
- Value Proposition Budgeting
The incremental approach considers the historical data to make adjustments according to various inputs and factors impacting the line and operations of the business. These take into account the market analysis, industry analysis, business operations and policies, business environment, and demand and supply. This approach is quite convenient to not only use but also comprehend (Ibrahim, 2013). Zero-based budgeting, as the name suggests, does not consider the previous record. Rather, it starts from scrap using all the new research and information. Therefore, it takes a considerable amount of time. Nonetheless, it offers a fresh outlook that may be needed to overdo the mistakes done in the previous budgeting methods (Cavalca, Gortz, & Ejrnæs, 2022). Furthermore, it tends to be more accurate and optimized. Nonetheless, this approach is costly since not everyone is experienced, and it takes time to learn the fundamentals and application of this methodology (Coyte, Zhou, & Messner, 2021). The activity-based budgeting is a top-down methodology that takes into consideration certain targets during the budgeting process. This is ideal if the targets are clear. The value-based budgeting regards the whole procedure from the interesting perspective of all the stakeholders including customers, employees, shareholders, etc (Douglas & Overmans, 2020).
Since it is fundamental to choose the right budgeting process, the Refrigerator goods division has chosen the incremental and value proposition budgeting processes. This is because these methods are simple and easy to use and understand (Gabriela Lidia, 2014). Furthermore, these keep the operations stable and promote coordination between departments of the company giving adequate consideration to operations and funding. In addition to this, all the perspectives are considered that enable the long-term sustainability of the company leading to a robust brand image (Kovaleva, Gavrilov, Nikeryasova, Glukhova, & Khvostenkoa, 2016). Moreover, the mixture of these two approaches will help the organization in various ways as the value proposition will cater to the flaws of the incremental approach by justifying each aspect and mitigating the possibility of overspending. Hence, this will prove cost-effective and efficient for the company as well. The other two approaches zero-based budgeting and activity-based budgeting are not ideal in our case since the company has no expertise and these approaches would be more costly for the company. Furthermore, these approaches would require the time that we had been short on (Mollah, Rouf, & Rana, 2021).
Relevant Calculations
To begin with, relevant calculations, let me just ascertain that all the figures mentioned in this report are in £’000. Let us ponder over the revenue first before moving on to the expenses:
The company achieved its target last year by around 29%. Nonetheless, the company may not be able to achieve the same target due to the capacity of only delivering 140,000 tonnes which may take the revenue up to £ 26.6 million. Considering the realistic figure of the quote of £ 0.19 per tonne as average.
The first and foremost expense of the department entails the salaries that are divided into three categories of Drivers, Depot Operatives, and Administrative Staff.
The department has 202 drivers, 97 depot operatives, and 11 administrative staff. The average salaries are £ 35, £ 19, and £ 27 per year with the Employer’s National Insurance Contributions at 13.8% after deducting the initial £ 8.84 from the employee’s salary, Apprenticeship levy at 0.5% on salaries and bonuses, and Superannuation scheme at 8.5% on salaries and bonuses. The Drivers are also paid a bonus of 10% for no accidents and the insurance is not covered for the drivers centrally. The calculations are as follows:
Drivers = 202 * (35 + (35*10%) + (38.5*0.5%) + (38.5*8.5%))
= 8,477
Depot Operatives = 97 * (19 + ((19 – 8.84) * 13.5%) + + (19*0.5%) + (19*8.5%))
= 2,144
Administrative Staff = 11 * (11 + ((11 – 8.84) * 13.5%) + + (11*0.5%) + (11*8.5%))
= 10,973
For Building Depreciation, the cost has been ascertained at £ 3500 with a useful life of 50 years. The scrap life of the building and its materials is determined to be £ 700. The method for depreciation used is a straight-line basis, which is as follows:
Building Depreciation = (3500-700) / 50
= £ 56
Building maintenance accounts for £ 7 per month.
Building Maintenance = 7 * 12
= £ 84
The department has around 151 heavy goods vehicles and 16 other vehicles with a useful life of 12 years each. The scrap value for all of these is ascertained to be 10% of the cost. The costs for heavy goods vehicles are £ 120 each and for other vehicles, it is £ 24 each.
Heavy Goods Vehicles Depreciation = 151 * ((120*(1-10%))/12)
= £ 1359
Other Vehicles Depreciation = 11 * ((24*(1-10%))/12)
= £ 19.8
Total Vehicles Depreciation = £ 1378.8
Vehicles Maintenance has been forecasted based on historical trends increasing by £ 1 each month making it to be totaled £ 1362 for the whole year.
The depreciation for other equipment is provided to be £ 228.
The maintenance of other equipment is also fixed at £ 12 per month making it £ 224 for the whole year.
Vehicles Fuel has been calculated through the determination of variable and fixed cost, which is as follows:
Vehicle Fuel Total cost = VC*x + FC
(i) 409 = VC*11205 + FC
(ii) -407 = (VC*11095) – FC
2 = 110 VC + 0
0.018181818 = VC
409 = 0.018*11205 + FC
409 – 203.73 = FC
FC = 205.27
Considering this and the estimation of the tonnes to be delivered, the fuel cost has been calculated at £ 5009.
Other Power Supplies are determined at £ 15 per month and £ 180 per year.
The Vehicle Excise Duty is expensed at different rates for each type at £ 560 for heavy goods vehicles and £ 220 for other vehicles.
Heavy Goods Vehicles Depreciation = 151 * 560
= £ 84.56
Other Vehicles Depreciation = 11 * 220
= £ 3.52
The Vehicle insurance totals £ 2.4 per vehicle for heavy goods and £ 0.4 per vehicle for other vehicles.
Heavy Goods Vehicles Depreciation = 151 * 2.4
= £ 362.4
Other Vehicles Depreciation = 11 * 0.4
= £ 6.4
The company also incurs an expense for staff training accounting for £ 1.225 for each driver, £ 0.225 for each depot operative, and £ 0.275 for each administrative staff.
Drivers = 202 * 1.225
= 247.45
Depot Operatives = 97 * 0.225
= 21.825
Administrative Staff = 11 * 0.275
= 3.025
Proposed Budget
The budget for the year 2022-2023 along with the budget of last year is as follows:
| Year May’22-Apr’23 | Budget 2021-2022 | Budget 2022-2023 | ||
| £000 | £000 | |||
| Income from Refrigerated Goods Customers Expenditure | 24,760 | 26,600 | ||
| Salaries and Associated Payroll Costs | ||||
| Drivers | 8,540 | 8,477 | ||
| Depot Operatives | 1,952 | 2,145 | ||
| Administrative Staff | 324 | 351 | ||
| Total | 10,816 | 10,816 | 10,973 | 10,973 |
| Buildings Depreciation | 56 | 56 | ||
| Buildings Maintenance | 84 | 84 | ||
| Vehicle Depreciation | 1,356 | 1,379 | ||
| Vehicle Maintenance | 1,266 | 1,362 | ||
| Other Equipment Depreciation | 254 | 228 | ||
| Other Equipment Maintenance | 152 | 144 | ||
| Vehicle Fuel | 4,758 | 5,009 | ||
| Other Power Supplies | 176 | 180 | ||
| Vehicle Excise Duty | 86 | 88 | ||
| Vehicle Insurance | 358 | 369 | ||
| Staff Training | ||||
| Drivers | 240 | 247 | ||
| Depot Operatives | 22 | 22 | ||
| Administrative Staff | 4 | 3 | ||
| Total | 266 | 266 | 272 | 272 |
| Total Expenditure | 19,628 | 20,144 | ||
| Profit | 5,132 | 6,456 | ||
Investment Appraisal
It is important to know whether an investment would be fruitful for a company or not before investing in it. Even though the result may not be certain, it can surely mitigate some uncertainties and provide an estimate (Le, 2021). Therefore, it can be deemed that capital budgeting techniques assist the feasibility of an investment which is a fundamental approach for any company to take before initiating the project. There are various approaches to ascertain the profitability of an investment that includes, including Net Present Value (NPV), Discounted Cash Flow (DCF), IRR, MIRR, etc. Every method has its pros and cons and thereby is ideal for different circumstances. The company must decide on the right methodology to get the outcome it wants. During the procedure of investment appraisal, various factors are considered. These include the prediction of expected cashflows, determination of the associated risks, alternative cashflow forecasts, etc. The approach selected for the Refrigerator goods division entails the Net Present Value since it considers the time value of money (Gaspars-Wieloch, 2019). Moreover, it regards the discounted cash flow of the investment and the whole project deriving a realistic outcome. Furthermore, this approach is rather easy to employ and understand. Nonetheless, it also encompasses certain drawbacks including the reliance on long-term projections and no accounts for the non-financial metrics (Žižlavský, 2014).
The NPV calculated for the new Depot is as follows:
The current achievable sales are estimated to be £ 26,600 due to the capacity of 140,000 tonnes/km. We have determined the new sales target to be at £ 31800.
The additional expenditure it will incur is as follows:
| Drivers | ||
| Count | 40 | for 1.4 m tonnes/km |
| Cost | 139.88 | |
| Training | 4.08 | |
| 143.97 | ||
| Administrative Staff | ||
| Count | 3 | |
| Cost | 7.98402 | |
| Training | 0.06875 | |
| 8.05277 | ||
| Vehicle | ||
| Count | 20.00 | |
| Depreciation | 15.00 | |
| Maintenance | 0.01 | |
| Fuel | 266.71 | |
| Excise | 0.93 | |
| Insurance | 0.67 | |
| 283.32 | ||
| Total | 435.34 | Per Month |
| 5,224.07 | Per Year | |
| Total Expense | 25,368.29 |
The total profit calculated by deducting the total expense of £ 25368 from the total revenue of £ 31800 comes to be £ 6,432. This is the additional profit the new depot will generate other than the old estimate of £ 6456.
| Profit from New Depot | 6,431.71 | ||||
| Discount rate | 9% | ||||
| Time | 12 months | ||||
| NPV | = | 6,431.71 | / | ((1+9%)^12) | |
Conclusion
This report highlights the budget of Clark Casc Logistics plc for the year 2021-2022 that is employed to generate a new budget for the year 2022-2023 while using the actual values for the initial 6 months that have passed. While instigating the matter, this report expands on the significance of budgeting and its types to elaborate on the reasons for selecting the mixture of incremental and value proposition budgeting approaches. The logical reasoning has been ascertained at the points of easy application and understanding with the consideration of the interests of all the stakeholders in making the best decision for the growth and sustainability of the business. In addition to this, the proposed budget has been catered to the real numbers which have further been utilized to derive the feasibility of the expansion plan of the new depot. Not only this, NPV has been used to analyze the profitability of the new expansion. This further expands on the used methodology of investment appraisal while considering the NPV and the assumptions that have been considered for the expansion plan at hand.
Recommendations
The above report suggests that the budget that had been proposed before has been very close to the estimates that have been achieved in reality. Nonetheless, the budget has further been narrowed down to suggest a more accurate picture. This report puts forth the following recommendations:
- The company needs to determine the allocation of funding for the new plan to derive a more accurate investment appraisal analysis. This is due to the fact that the figures must be accurate or at least close to approximation in order to ascertain the right numbers. This would help the company in deriving the appropriate budget and make a just decision relevant to investment in the expansion plan.
- The company must discover new ways to utilize its resources optimally. This would either result in making the resources more efficient or finding more efficient ways to utilize them. In both cases, it can impact the profitability of the company in a positive way.
- The expenditure can be further reduced by employing updated methods and procedures. This is because the company can modify its procedure saving on the cost of extra materials and labor. This can be executed through evaluating the current expenditure and finding alternatives with lesser costs.
- The company can come up with a better plan for operations that could decrease the logistic runs while increasing the total capacity. This can be executed through thorough planning and making efficient use of resources to deliver the goods loaded at full capacity while taking care of the routes to save on fuel costs.
- The training sessions must be evaluated appropriately to ensure that improved results are achieved. The company has been spending on the trainings of its employees. However, it must develop these schemes with clear objectives and KPIs in order to track the performance of the associates. It will not only deliver the results for the company as well as the employee to evaluate but may be used to motivate them as well for better outcomes.
- Periodic reviews must be conducted to reduce the variances in the budget to produce relevant and appropriate reports. Making realistic and appropriate budgets is surely beneficial for a company. Nonetheless, there are uncertainties that can impact the numbers at any time of any day. Therefore, the company must keep periodic checks in order to ascertain the new risks and amendments. This can help the company to make changes on time to keep on track of high possibilities of achieving its objectives.
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