DISTRIBUTION BUDGET

DESCRIPTION
This paper-based exercise is designed to provide participants with the opportunity to explore and understand basic financial accounts (Profit & Loss, Balance Sheet and Cash Flow) for a distribution type company. The activity takes between an hour and an hour and a half. It was derived from the DISTRIBUTION CHALLENGE computerised simulation. It can be used on its own or used as a precursor to Distribution Challenge. The documentation set for participants consists of: BUDGET BRIEF DIRECTORS' BRIEFS WORK SHEETS HOW THE WORKSHEETS ARE COMPLETED SOLUTIONS The training group is divided into teams of four participants. Each participant receives the budget brief and a full set of the work sheets. Depending on their role (Managing, Sales, Operations & Purchasing), individuals receive separate director's briefs. (At the end of the activity, individuals should receive copies of the other directors' briefs.) At the end of the activity or at appropriate points during it, the solution sheets should be given to teams.

DURATION
The activity will take about an hour to complete.

USE
This exercise is designed for use on Financial Appreciation sessions to review, reinforce and test understanding of proceeding sessions. The group should be divided in to teams of four and each member of these should be assigned a role (Managing Director, Purchasing Director, Sales Director and Operations Director. Each member should be given a copy of the Budget Brief and a copy of the three work sheets. And, depending on their role the appropriate director's brief. The pages explaining how the work sheets are used are for the Trainer and may help teams that are having difficulties. The solution pages can be handed out as a team completes the pertinent worksheet. The briefs include both pertinent and redundant information and to complete the work sheets must decide which data is relevant to the current calculation and share it with their fellow directors. If participants may not have calculators it is helpful to have some basic calculators available to give to teams.

FREE USE
You are free to use this exercise on your courses provide you attribute its source and do not sell the product to third parties. You may copy this document and reformat it (to reflect your house style and financial terminology). However, you must keep the copyright message on each page. This documentation is not public domain and Jeremy Hall of Hall Marketing asserts his rights.

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Budget Brief

PROLOGUE
You have just heard that the Financial Director has fallen off her mountain bike and will not be able to prepare the budget for the next quarter (91 days). This task has fallen on your shoulders and those of your fellow directors. With the proforma budgeting forms, the forecasts for next quarter, the closing position of the current quarter and other information you should be able to prepare the budget!

THE EXERCISE
This budgeting exercise is designed to help you understand the Profit and Loss Account, Balance Sheet and Cash Flow Report. Besides gaining familiarity you should see how a simplified set of accounts are derived and how they interlink. The exercise requires a minimum of mathematical skills (although a calculator will be useful). To help, the numbers have been kept small and three worksheets are available. But, unfortunately, the instructions for completing the worksheets are locked in the finance director's safe and, until she retains conscious no one knows the combination.

THE SITUATION
The company buys and distributes three groups of products:

DOMESTIC FASHION CONTRACT

Domestic, as the name implies, is sold to the domestic consumer, Fashion are bought on an opportunistic basis and can only be sold in the quarter they are bought. Contract are high quality products sold to commercial organisations. The company is a subsidiary of another company that requires a dividend each quarter. To simplify the arithmetic, all money is expressed in a universal currency: the Account Unit (AU)

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Managing Director

As managing director you are responsible to the parent company for business success.

EQUITY
The parent company invested 5000 AUs in equity some three years ago. Initially, the company made losses but is now profitable. However, this means that accumulated reserves are still negative (-259 AUs).

DIVIDEND
Each quarter you must pay a dividend to the parent company. This dividend consists of two parts:

4 PERCENT OF PREVIOUS EQUITY 75 PERCENT OF NET PROFIT

From the last quarter there is a dividend of 2627 AUs due.

OTHER FUNDS
The company can borrow from the bank. However, it currently has a cash balance of 1577 AUs that is earning three percent each quarter.

OTHER EXPENSES
Head office and accounting costs amount to 1500 AUs each quarter.

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Purchasing Director

As purchasing director you are responsible for buying the products and getting the best terms from the suppliers.

PLANNED PURCHASES
For the next quarter you are planning to purchase the following values of the product ranges:

DOMESTIC = 24000 AUs FASHION = 9500 AUs CONTRACT = 8000 AUs

VOLUME DISCOUNTS
Discounts can be obtained provided more than certain amounts are purchased.

Range Value Discount DOMESTIC 40000 AUs 5% FASHION 15000 AUs 20% CONTRACT 20000 AUs 10% PROMPT PAYMENT DISCOUNTS
Additional discounts can be obtained if payment is made earlier than thirty days. These discounts are as follows: Payment Discounts: Immediate payment 5%; 6 days 4%; 12 days 3%; 18 days 2% and 24 days 1%. You are taking no discounts and pay after thirty days.

OTHER EXPENSES
The purchasing unit costs 500 AUs each quarter to run.

CREDITORS
The value of money owed to suppliers is currently 12260 AUs.

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Sales Director

As sales director you are responsible for setting the markup and forecasting sales for each product group. Additionally, you are responsible for deciding selling costs.

MARKUPS
The markups decided for the next quarter are to be as follows:

DOMESTIC = 22% FASHION = 75% CONTRACT = 50%

SALES FORECASTS
Forecast sales are demand at cost and are as follows:

DOMESTIC = 24472 AUs FASHION = 8274 AUs CONTRACT = 8941 AUs

These are obviously forecasts and actual sales may be different from these.

SELLING COSTS
The budgeted selling cost for the next quarter is 500 AUs.

REVENUE
Budgeted sales revenue for each product group is calculated by first calculating the gross profit (by multiplying the markup by the forecast sales). Gross profit added to forecast sales (at purchase price). However, this revenue will only be obtained if there are sufficient Inventory to service demand.

DEBTORS
To make life easier, all sales are for cash!

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Operations Director

As operations director you are responsible for inventories and transportation.

INVENTORY
At the end of the current quarter the inventory values are as follows:

DOMESTIC = 11606 AUs FASHION = 0 AUs CONTRACT = 6445 AUs

TRANSPORTATION
Currently eleven vehicles are leased at a cost of 500 AUs each. Each of these can transport about 4000 AUs worth of product each quarter.

OTHER EXPENSES
Besides the transportation costs you are responsible for warehousing and other staff. These cost 5000 AUs each quarter.

BANK INTEREST
You are responsible for inventory and are being pressured to reduce them (borrowing from the bank costs 5% each quarter).

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 1

PURCHASES Opening Inventory + Gross Purchases = Available Inventory - Demand at Cost - Markdowns = Closing Inventory SALES INCOME Sales at Cost x Markup = Gross Profit Sales Income DISCOUNTS Discount Level Gross Purchases x Discount = Volume Discount = Net Purchases Domestic Fashion Contract Total

Domestic

Fashion

Contract

Total

Domestic

Fashion

Contract

Total

PROMPT PAYMENT Total Net Purchases x Prompt Payment Discount % = Payment Discount CLOSING CREDITORS Payment Days = Fraction Remaining x Net Purchases = Closing Creditors

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 2

OPERATING EXPENSES Sales Effort + Transportation = Other Expenses - Volume Discount - Payment Discount = Operating Expenses CASH FLOW (sources) Opening Cash + Sales Income = Total Cash Available CASH FLOW (uses) Opening Overdrafts + Opening Creditors + Gross Purchases + Operating Expenses + Dividend for Parent - Closing Creditors = Total Cash Needed FINANCIAL EXPENSES Net Cash Balance + Interest = Closing Cash or Overdraft

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 3

PROFIT & LOSS Sales Income - Sales at Cost = Gross Profit - Mark Downs - Operating Expenses - Interest = Net Profit - Dividend for Parent = Retained Profit BALANCE SHEET Share Capital + Reserves = Total Equity ASSETS Inventory + Cash = Current Assets LIABILITIES Overdraft + Dividend for Parent + Creditors = Current Liabilities

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 1 (notes on completion)

This page of notes explain where data is found, how calculations are done and considerations Opening Inventory - Operations Director's Brief Gross Purchases - Purchasing Director's Brief Available Inventory - Opening Inventory plus Purchases Demand at Cost - Sales Director's Brief Closing Inventory & Markdowns - Available Inventory less Demand at Cost. Note: There can be no closing Inventory for Fashion. For Fashion the difference between Available Inventory and Demand at Cost is disposed of as markdowns. Sales at Cost = Demand at Cost (if there is sufficient inventory) Markup - Sales Director's Brief Gross Profit - Sales at Cost multiplied by Markup Sales Income - Sales at Cost plus Gross Profit Note: Markup is different from gross margin. Discount Level - Purchasing Director's Brief Gross Purchases - Purchasing Director's Brief Discount Level - Purchasing Director's Brief Volume Discount - Gross Purchases times Discount Level Net Purchases - Gross Purchases less Volume Discount Note: With the budgeted purchases, there are no volume discounts. Net Purchases - from above Prompt Payment Discount % - Purchasing Director's Brief Payment Discount - Net Purchases multiplied by Payment Discount. Note: With the budgeted payment time, there is no payment discount. Payment Days - Purchasing Director's Brief Fraction Remaining - Payment Days divided by the days in the Budget Period (Period Budget Brief) Net Purchases - from above Closing Creditors - Net Purchases times Fraction Remaining Note: With the budgeted data, the fraction remaining is 30/91 = 0.33. Teams may have slightly different results.

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 2 (notes on completion)

This page of notes explain where data is found, how calculations are done and considerations Sales Effort - Sales Director's Brief Transportation - Operations Director's Brief Other Expenses - various briefs Volume Discount - from above Payment Discount - from above Operating Expenses - calculated from above Note: Selling Effort is the selling costs shown on the Sales Director's brief. Transportation will have to be calculated from the number of vehicles and the leasing cost. Other Expenses are summed from three separate briefs (Purchasing, Operations and Managing). This variety of sources for the other expenses should stimulate discussion! (At this stage, it may be helpful to suggest that teams tick data as they use it.) Opening Cash - Managing Director's Brief Sales Income - from Work Sheet 1 Total Cash Available - sum of above Opening Overdrafts - Managing Director's Brief Opening Creditors - Purchasing Director's Brief Gross Purchases - from Work Sheet 1 Operating Expenses - from above Dividend for Parent - Managing Director's Brief Closing Creditors - from Work Sheet 1 Total Cash Needed - calculated from above Notes: If Opening Cash exists Opening Overdrafts must be zero and visa versa. Net Cash Position - Cash Available less Cash Needed Interest - Cash Position times Interest Rate Closing Cash or Overdraft - sum of above Notes: The Managing Director's brief shows the interest rates. The signs of the calculation, the choice of interest rate and whether the closing position is cash or overdraft should provide discussion!

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 3 (notes on completion)

This page of notes explain where data is found, how calculations are done and considerations Sales Income - from Work Sheet 1 Sales at Cost - from Work Sheet 1 Gross Profit - from Work Sheet 1 Markdowns - from Work Sheet 1 Operating Expenses - from Work Sheet 2 Interest - from Work Sheet 2 Net Profit - calculated from above Dividend to Parent - calculated (see note). Retained Profit - Net Profit less Dividend Notes: The interest shown on Work Sheet 2 is the interest earned. In the Profit & Loss Account it is interest paid - this should provoke discussion! The Dividend to Parent is NOT the same as last year. It must be calculated according to the formula in the Managing Director's Brief - viz. 75% of last quarter's equity (5000-259) plus 25% of Net Profit. Share Capital - Managing Director's Brief Reserves - calculated (see note). Total Equity - Inventory Capital plus Reserves Note: Reserves are the sum of the reserves last year (Managing Director's Brief) plus the retained profit from the P & L (above). Inventory - from Work Sheet 1 Cash - from Work Sheet 2 Current Assets - Inventory plus Cash Notes: Ensure teams use closing values for Inventory and Cash. Overdraft - from Work Sheet 2 Dividend for Parent - from Profit and Loss Creditors - from Work Sheet 2 Current Liabilities - sum of above Net Assets - Current Assets less Current Liabilities Notes: Ensure values are closing values. Net Assets should match Total Equity. If they do not then there has been an error.

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 1 (solution)

PURCHASES Opening Inventory + Gross Purchases = Available Inventory - Demand at Cost - Markdowns = Closing Inventory SALES INCOME Sales at Cost x Markup = Gross Profit Sales Income DISCOUNTS Discount Level Gross Purchases x Discount = Volume Discount = Net Purchases Domestic 11606 24000 35606 24472 0 11134 Domestic 24472 22 5384 29856 Domestic 40000 24000 0 0 24000 Fashion 0 9500 9500 8274 1226 0 Fashion 8274 75 6206 14480 Fashion 15000 9500 0 0 9500 41500 0 0 30 0.33 41500 13681 Contract 6445 8000 14445 8941 0 5504 Contract 8941 50 4471 12412 Contract 20000 8000 0 0 8000 Total 18051 41500 41687 1226 16638 Total 41687 16060 57747 Total 41500 0 0 41500

PROMPT PAYMENT Total Net Purchases x Prompt Payment Discount % = Payment Discount CLOSING CREDITORS Payment Days = Fraction Remaining x Net Purchases = Closing Creditors

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 2 (solution)

OPERATING EXPENSES Sales Effort + Transportation = Other Expenses - Volume Discount - Payment Discount = Operating Expenses CASH FLOW (sources) Opening Cash + Sales Income = Total Cash Available CASH FLOW (uses) Opening Overdrafts + Opening Creditors + Gross Purchases + Operating Expenses + Dividend for Parent - Closing Creditors = Total Cash Needed FINANCIAL EXPENSES Net Cash Balance + Interest = Closing Cash or Overdraft 500 5500 7000 0 0 13000 1577 57747 59324 0 12260 41500 13000 2627 13681 55706 3618 109 3727

1994 & 1999 Jeremy J. S. B. Hall

DISTRIBUTION BUDGET Worksheet 3 (solution)

PROFIT & LOSS Sales Income - Sales at Cost = Gross Profit - Mark Downs - Operating Expenses - Interest = Net Profit - Dividend for Parent = Retained Profit BALANCE SHEET Share Capital + Reserves = Total Equity ASSETS Inventory + Cash = Current Assets LIABILITIES Overdraft + Dividend for Parent + Creditors = Current Liabilities 57747 41687 16060 1226 13000 -109 1942 1646 296 500 37 5037 16638 3727 20365 0 1646 13681 15328

1994 & 1999 Jeremy J. S. B. Hall