Green Pastures is a business experiencing serious problems. The firm’s financial health is not rosy and something urgent needs to be done. To dissect the problems, this paper will look at why the firm might be loss making and at the same time, examine some spending habits of the firm and finally give recommendations on how the same problems can be addressed.
Boarding days for the in Green Pastures increased than the anticipated level. Given this, it means that as the boarding days increased, there was a corresponding increase in the expenditure catering for the mares. Even with less mares, costs did not ease and this compounded costs. Even with the increasing costs compared with incomes, management decided to have increased expenditures in terms of advertisement. This spelt doom for the company since it did not recoup its investment from the advertisement through more sales. The same point cannot be plainly dismissed since customers might take time before responding to adverts especially in the short run (which is what we are interested in). Management might have had a noble idea by advertising their firm but there was a chance that the same was not done aggressively enough to outshine competition. Entertainment was increased even with reduced sales and increasing advertisement. It means that management had not placed a tab on expenditure relating to entertainment and the employees seem to have noted that management is not very keen on that kind of control. By taking advantage, the firm decided to get its guests entertained at the expense of making sales, an idea that has contributed to bringing the firm where it is now. According to Brown et al, (2014), the same problem of overshooting the budget can be rectified through the use of a flexible budget. The same helps in absorption of small changes in the real world different from what was planned.
The management was not outright honest with its control of expenses. First, as mentioned there above, there would have been no entertainment. Entertainment should be a reward for work well done, but in this case, it was awarded where it was not due (there was no corresponding increase in sales). Labor seems to be taking a huge chunk of revenues. Management should device means of controlling expenditure on that item. For instance, it could consider going for automation or enter into a negotiation with the employees for increased time with the same pay. Management could have argued with the workers that the firm was not performing properly and that to stay afloat, drastic measures had to be taken including downsizing. Instead of downsizing, management would have given the option of more hours.
Management might have used old means of entertainment to shore up sales through advertising. Brochures have been proved a failure and there is need to rethink the strategy. Management should quit absorbing costs such as entertainment and printing of brochures and instead use a mechanism of developing adverts that can reach a more significant geographical area such as social media and other online means. The same is free, advertising should have been more aggressive and objective. Green Pastures should endeavor to drive quality care for their clients and thus attract more clients while at the same preaching the gospel of their firm being affordable but with quality care. Insurance need to be rethought so that it can move with the level of business. The same being static means that there is a highly high possibility of having a raw deal especially when business is slow as described by Horngren et al, (2002), who expressed that majority of the costs, if possible, should be made variable especially if they are not extremely significant to the production cycle.
To help Green Pastures get out of the woods, I would make a raft of recommendations. First, the firm should abolish entertainment for their clients and instead, develop a quality care system that appeals to the clients as value for money. On this, management will be driving clients to their ‘moment of value’, something that can easily translate to return purchase and referrals. Second, the mode of advertisement should change, the firm should come up with online marketing campaigns which offer room for creativity and cost efficiency. This advertisement approach would lead to a significant reduction in costs and have that budget transferred to another important field. The managers of Green Pastures should come up with means to develop working schedules that reduce the wage bill. For instance, the firm should have labor paid per hour and at all, avoid permanent employees. With wage employee, labor costs will increase with increasing sales but not reduce at a decreasing rate as compared to sales. Insurance seems to be lump sum for a whole period. As a business that is dealing with fluctuating clients, insurance should be booked with the level of clients per each given moment. This will ensure that premiums for livestock is pegged on the actual number of animals in the firm.
Braun, K. W., Tietz, W. M., Harrison, W. T., Bamber, L. S., & Horngren, C. T. (2014). Managerial accounting. Pearson.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.
|Flexible Budget Income Statement|
|For the Year Ended December 31, 2017|
|Number of Mares||52|
|Number of Boarding Days||19000||21900||-2900|
|Less Variable Expenses||–|
|Total Variable Expenses||178,390.00||192,720.00||(14,330.00)|
|Less: Fixed Expenses||–|
|Repairs & Maintenance||10,000.00||11,000.00||(1,000.00)|
|Total Fixed Expenses||180,000.00||184,000.00||(4,000.00)|
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