B1. Analyze Simulation Results
A budget is a financial plan which is expressed in real numbers, typically in monetary units, which set the expectations for the expenses the company will incur to reach its goals, and management objectives. A good budget uses forecasts to determine what amounts should be used to reach desired efficiency and profitability. Budgets can be used to determine whether a not a process is working effectively, whether or not changes in operations need to be made in order to reach goals, and can help solve problems before they occur and help make changes when necessary. Budgets are important because they provide a quantitative measurement to establish goals, coordinate efforts and departments, and help to realize changes are needed before problems occur. Budgets should be broken down into fragments (short term, mid-term, and long term) which will allow for more precise measurement of the success of a project, allow for changes to be made before moving onto new projects, and to expand on goals when appropriate. By setting short term budget goals and reaching them it helps to ensure that the company is on pace to reach its long term objectives. Budgets need to be revised whenever they no longer useful for planning and control purposes. Anytime there are major changes in the processes or operations the budgets will also need to be revised. Budget figures should be measured frequently to ensure they are still reasonable and that the company is still on track to reach its goals. A Pro-Forma Statement is defined as “a financial statements prepared on the basis of some assumed events and transactions that have not yet occurred.” (Ralph Estes). Unlike Historical Financial Statements which use real scientific information and are based on facts, Pro-Forma Financial Statements use assumptions to help forecast the future and allow for the use of creativity and flexibility. Pro-Forma Financial Statements are similar to Historical Financial Statements in look and content, both use the same major financial statements including the income statement and the balance sheet, but the Pro-Forma Financial Statement allows for changes to be made in the volatile environment.
Pro-Forma Statements are important because they provide the needed information to track progress towards goals. They are based on historic figures so they do provide realistic projections while still allowing for adjustments as needed. Typically a long collection of historic data is used to produce a Pro-Forma Income statement; since the company I created was a start up our information was limited there was even more of a reliance on projections to complete my statements. In the first quarter I had start up factory expenses of $430,000 and spent $120,000 on market research. I had gained $3,000 in interest from a small deposit into a short term CD. I had invested $1,100,000 for fixed plant capacity. Of the $2,000,000 of initial capital $547,000 was used for start-up expenses leaving the company with $1,453,000 in current assets.
Important decisions had to be made during Quarter 1 in order to make my projections and set my budgets and expectations. First I had to choose what products to manufacture. I wanted to look for two segments which had some similar wants and needs. By developing two products for two segments with similar wants and needs the hope was that I would be pay off later in saving manufacturing costs by utilizing customization of parts, decrease training costs, cut down on salary expense by having a sales force that could be knowledgeable with both products, and would allow the company to provide better service after the sale. The decisions were all based upon the market research which had been done providing the wants and needs of the segments as well as the price willing to pay, the 12 month demand, and the demand per city. By performing some simple calculations (i.e. price willing to pay X Demand / cost to produce) I was able...
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