Babycakes is a New York City bakery which specializes in health conscious, vegan baked goods. Health conscious fresh baked goods are a growing trend and represent an important emerging market (Martínez-Monzó et al., 2013). Babycakes has proven very popular in its original location, and this motivated the owner to open a new store in the Los Angeles area. Budgeting will be an important aspect of ensuring the new location is a success; however there is no previous history of sales in the new location to use in providing sales estimates. For this reason the owners must base their estimates on previous sales at the New York location.
The benefits of a realistic budget
A realistic budget can provide many benefits to the business owner, the main ones being the capacity to make a profit and stay in business. Without a realistic budget there are two financial risks which can threaten the business, those being deficits in cash flow and lack of profitability. A deficit in cash flow impacts the business as it may not be possible to pay for the needed supplies for production, which further impacts capacity for sales (Wiley, 2011). The outcome may be a need to take out a loan or line of credit, which will have negative impacts on profits. A lack of profitability has even more dire effects, as it can result in losses and bankruptcy followed by business closure. As the owner of Babycakes describes, a budget allows for efficiency and monitoring of performance (Wiley, 2011). Having no budget at all presents grave difficulties for managing the business successfully. In addition to the financial risks of cash flow deficits and lack of profitability are the risks of having no goals to be used by employees to establish their performance expectations and potential waste when planning is not used to allocate resources and determine production (Wiley, 2010).
4th quarter sales budget
The sales assumption used for a typical day in the new location is one-half of the typical sales of red velvet cupcakes on Valentine’s Day in the New York location. This assumes sales of 500 units per day, with an average sale price of $3.50. This provides sales projections of $1,750 per day, and assuming a thirty (30) day month this would be monthly sales totaling $52,500 and $157,500 for the quarter. These sales projections assumptions do not include holiday season products, which may be a substantial part of revenues for this quarter.
New products for 4th quarter
The three holiday seasons in the 4th quarter present an opportunity to create new products. It can be helpful to use budgets as a basis for determining what new products would be successful and profitable by determining the fixed and variable costs of production, and then determining a price which ensures that the products have a profit margin. Halloween, Thanksgiving, and the Christmas and New Year’s season are holidays which each provide such an opportunity. Halloween is a holiday that is known for its sweet tooth, and this provides an opportunity for Babycakes to create a new product which could be marketed as a healthier alternative to giving away candy to children. Donut holes and cookies which are creatively decorated in Halloween designs could be sold in high volumes in order to meet the needs of adults who would otherwise buy mass produced sweets. For Thanksgiving, Babycakes might consider developing and marketing the perfect sourdough bread for turkey leftovers, thereby creating a product which might sell at a high volume for as much of as a week after the holiday. For Christmas, Babycakes might consider a uniquely decorated traditional yule log which included festive designs. The marketing which Babycakes currently uses is based on social networking, and is therefore cost effective. Based on the results for Valentine’s Day, where 1500 units of specialty red velvet cupcakes were sold, a conservative estimate might be that 750 units are sold. The pricing of the units would have to take into account the costs of production, but for this exercise we will assume a sales price of $15 for a package of Halloween baked goods (which might include 20-30 items), $5 for a loaf of turkey sandwich ready sourdough loaves and $10 for specialty yule logs provides the necessary markup to cover production costs and a reasonable profit. In that scenario the Halloween sweets which have total sales of $11,250 per day, the Thanksgiving loaves $3,750 per day and the Christmas yule logs would have sales of $5,000. Assuming each item has only one day for sales, this would provide additional revenue for the quarter of $20,000. If sales were extended for several days it is possible that the sales could be far higher.
Flexible budget
The owner of Babycakes is focused on baking healthy vegan products, but the financial budgeting aspects are just as important to her business. By using a flexible budget rather than a static budget, certain problems can be overcome such as the counterintuitive problem with variance from the static budget when sales for Babycakes increase (Ekholm & Wallin, 2011).This variance is caused by the increase in variable costs of the operating budget, such as the raw ingredients needed to bake the increased number of products. It should be noted that while the budget variance from the static budget is unfavorable, it does not actually represent a negative situation. A flexible budget will overcome this problem by ensuring that the variable costs associated with each increased unit of production are reflected in the budgeted costs. For example, if it becomes clear that the sourdough loaves for Thanksgiving will be a great sales feature for five days following Thanksgiving; this can be reflected in the sales and production budgets through a simple amendment. In that case the increased production costs and the increased sales will also show as an increase in profits, and the variance will be reduced.
Financial challenges
A disruption which could create a financial challenge for Babycakes would be a world wheat shortage which created an increase in the price of flour. This is not a far-fetched scenario, as wheat prices are very sensitive to problems such as drought or political instability, and food prices have risen substantially in the past ten years (Dawe et al., 2015). The result would be that the production budget would be inadequate. Trying to keep to the dollar amounts of the budget would result in less production, and further keeping items at the same price might result in a loss for the bakery given the new increased price of the necessary ingredient. Corrective actions might include increasing the number and marketing of products which do not use flour such as those that are gluten free, raising prices on those products that do use flour and trying to find the best value in flour sources in order to minimize the costs that are incurred.
- Dawe, D., Morales-Opazo, C., Balie, J., & Pierre, G. (2015). How much have domestic food prices increased in the new era of higher food prices? Global Food Security, 5, 1-10.
- Ekholm, B. G., & Wallin, J. (2011). The impact of uncertainty and strategy on the perceived usefulness of fixed and flexible budgets. Journal of Business Finance & Accounting, 38(1‐2), 145-164.
- Martínez-Monzó, J., García-Segovia, P., & Albors-Garrigos, J. (2013). Trends and innovations in bread, bakery, and pastry. Journal of Culinary Science & Technology, 11(1), 56-65.
- Wiley. (2011). Budgetary Planning featuring Babycakes *FULL VIDEO*. YouTube. Retrieved from: https://www.youtube.com/watch?v=frh3I2rVDzs
