Budgeted Income Statement is a projection of income statement in future budgets. On the other hand, cash flow is used to determine the liquidity of an organization (Zvi, 2013). Positive cash flow means the organization has increasing liquid assets hence can expand. Negative cash flow means the organization’s liquid assets are declining.
The restaurant had a negative cash flow in the first two months. The cash outflow exceeded the cash inflow. In the first month the company disbursed a total of $38200 and only received a total of $32000. In the second month, cash inflow was $56000 whereas the outflow was $62500. This means that if the trend is not reversed, the company will run bankrupt since it will not be able to meets its obligations to both employees and suppliers (Kaplan & Atkinson, 2015). The negative cash flow means that liquid assets are on the decline. The trend is not is not sustainable in the long run.
The owner of the restaurant must enhance cash management by minimizing the cash outflow. This can be done by first reducing the cost of labor. This can be through reducing the number of employees or cutting down their wages. The manager should also consider adopting efficient and cost friendly method of sales to bring down the cost of sales. This in turn leads to rise in gross profit and more cash inflow (Duchin, Schimdt, & David, 2013). Unnecessary expenditures that might have existed in the two months can also be dropped. On the other hand, the management can increase cost of advertisement so as to get more clients. This in turn will lead to increase in cash inflow.
The manager can improve the company’s liquidity by minimizing the expenditures. More cash inflow means the restaurant is able to meet its short term obligations like paying employees and other services offered.
Question 1: Budgeted Income Statement First month Second Month
Sales 40,000 60,000
Less cost of sales (35%) (14,000) (21,000)
Gross profit 26,000 39,000
Cost of labor, 30% (12,000) (18,000)
Cost of payroll, 25% (3,000) (4,500)
Supplies, 5% (2,000) (3,000)
Advertising (600) (600)
Depreciation (1,000) (1,000)
Rent (3,000) (3,000)
Other expenses (4,800) (7,200)
Total expenses 25,600 37,300
Net profit 400 1,700
Question 2: Cash flow analysis
First Month Second month
Cash Inflow, 80% 32,000 56,000 (80%+8,000)
Cash outflow 38,200 62,500 (4,000)
Net cash flow (6,200) (6,500)
Account Receivable Balance
60,000 – 56,000 = $4,000
Account payable balance
21,000*90% = $18,900
In conclusion the budgeted income statement and cash flow analysis is very important in any business as helps the management in making precise and accurate decision. The manager can decide to change mode of operation or not depending on the company’s cash flow.
Duchin, R., Schimdt, B., & David, D. (2013). Cash flow hedging and liquidity choices. Review of Finance : rft006.
Kaplan, R., & Atkinson, A. (2015). Advanced Management Accounting. PHI Learning.
Zvi, B. (2013). Investment. New York: McGraw-Hill.