Question

Tom and Eddie's, is an upscale hamburger restaurant in the Chicago area. Started in 2009 so they financed the operation themselves with the help of a third partner. The partners had long and successful careers as executives with McDonald's and, recognizing the importance of the financial function, they hired another former McDonald's executive as CFO. Tom and Eddie's had 3 restaurants and wanted to expand to 10 stores and then franchise the operation. There are many considerations in planning and opening new restaurants, including the demographics of the area, the square footage of the surrounding commercial space, ease of access and even the design of furniture and equipment. The restaurants incur "known" costs, such as rent, payroll, taxes, utilities at the height of the recession, the partners had difficulty securing bank financing. and other recurring costs, and cash flow is important in managing these costs because of the significant "unknown factor," which is sales. Tom and Eddie's also use a veny technology-intensive inventory management and control system because of the perishable nature of the ingredients used by the restaurants. Consider the different types of budgets discussed in the chapter. Which type of budget appears to be the most important to Tom and Eddie's CFO? Why?

Answer 1

Budget

A budget is a process of forecasting future expenses and revenue out of operation going to be performed.

Introduction

Herein Tom and Eddie were running hamburger restaurant. They wanted to expand their business. But, they don’t have a significant amount of finance also the country is foregoing recession even the bank is not interested in lending them funds. Therefore they partnered with an executive from McDonald's. Further they haired CFO from McDonald's executive as CFO.

Consider the different types of budget and discuss which types of the budget appears to be the most important to Tom and Eddie’s CFO? Why?

Different types of the budget to be discussed for the current scenario are:

• Investment budget: Cost of capital machinery, land and other heavy instruments which are a preliminary requirement for any business. These have to be plotted and its corresponding cost and return on investment had to be made in advance to choose the best land location and other types of equipment for running the restaurant.
• Operating budget: it is the process of estimating the expense required to run a business on a daily basis. Simply it's known as working capital.
• Cash flow budget: it is the process of estimating the income and expense of the business going to produce.
• Static budget: It is the process of estimating the fixed expense of the business.
• Financial budget: It is the process of estimating the opportunity cost.

Among the above mentioned 5 different types of budgets: the operating budget should be considered the most, reason:

With respect to business, the investment budget more or less remains the same, while cash flow budget can be realized only after the business is initiated, then static budget and financial budget also remains almost same, hence much care doesn’t need to be taken.

Operating budget depends on business performance with respect to the customer, customer attitude, customer perception, customer purchasing power, customer purchasing behavior, availability supplier, supplier relation and so on, thereby it varies with respect to place to place. Further, it requires at least one year to learn the demographic profile of the customers in particular locality where the restaurants are operating. So, attention had to take in order to include every possible expense that would possibly require to run the business for one year. Once it is estimated and the funds are allocated, one can initiate business, without one-year operating expenses if the business is initiated, there is a very high chance of business closure. Further one has to sustain at least one year in business in order to know the ups and downs in business.