DISTRIBUTION BUDGET
DESCRIPTION
This paper-based exercise is designed to provide participants with the opportunity to
explore and understand basic financial accounts (Profit & Loss, Balance Sheet and Cash
Flow) for a distribution type company. The activity takes between an hour and an hour and
a half. It was derived from the DISTRIBUTION CHALLENGE computerised simulation. It
can be used on its own or used as a precursor to Distribution Challenge. The
documentation set for participants consists of:
 BUDGET BRIEF
 DIRECTORS' BRIEFS
 WORK SHEETS
 HOW THE WORKSHEETS ARE COMPLETED
 SOLUTIONS
The training group is divided into teams of four participants. Each participant receives the
budget brief and a full set of the work sheets. Depending on their role (Managing, Sales,
Operations & Purchasing), individuals receive separate director's briefs. (At the end of the
activity, individuals should receive copies of the other directors' briefs.) At the end of the
activity or at appropriate points during it, the solution sheets should be given to teams.
DURATION
The activity will take about an hour to complete.
USE
This exercise is designed for use on Financial Appreciation sessions to review, reinforce
and test understanding of proceeding sessions. The group should be divided in to teams
of four and each member of these should be assigned a role (Managing Director,
Purchasing Director, Sales Director and Operations Director. Each member should be
given a copy of the Budget Brief and a copy of the three work sheets. And, depending on
their role the appropriate director's brief.
The pages explaining how the work sheets are used are for the Trainer and may help
teams that are having difficulties. The solution pages can be handed out as a team
completes the pertinent worksheet.
The briefs include both pertinent and redundant information and to complete the work
sheets must decide which data is relevant to the current calculation and share it with their
fellow directors.
If participants may not have calculators it is helpful to have some basic calculators
available to give to teams.
FREE USE
You are free to use this exercise on your courses provide you attribute its source and do
not sell the product to third parties. You may copy this document and reformat it (to reflect
your house style and financial terminology). However, you must keep the copyright
message on each page. This documentation is not public domain and Jeremy Hall of Hall
Marketing asserts his rights.
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Budget Brief
PROLOGUE
You have just heard that the Financial Director has fallen off her mountain bike and will
not be able to prepare the budget for the next quarter (91 days).
This task has fallen on your shoulders and those of your fellow directors. With the
proforma budgeting forms, the forecasts for next quarter, the closing position of the
current quarter and other information you should be able to prepare the budget!
THE EXERCISE
This budgeting exercise is designed to help you understand the Profit and Loss Account,
Balance Sheet and Cash Flow Report. Besides gaining familiarity you should see how a
simplified set of accounts are derived and how they interlink.
The exercise requires a minimum of mathematical skills (although a calculator will be
useful). To help, the numbers have been kept small and three worksheets are available.
But, unfortunately, the instructions for completing the worksheets are locked in the finance
director's safe and, until she retains conscious no one knows the combination.
THE SITUATION
The company buys and distributes three groups of products:



DOMESTIC
FASHION
CONTRACT
Domestic, as the name implies, is sold to the domestic consumer, Fashion are bought on
an opportunistic basis and can only be sold in the quarter they are bought. Contract are
high quality products sold to commercial organisations.
The company is a subsidiary of another company that requires a dividend each quarter.
To simplify the arithmetic, all money is expressed in a universal currency: the Account
Unit (AU)
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Managing Director
As managing director you are responsible to the parent company for business success.
EQUITY
The parent company invested 5000 AUs in equity some three years ago. Initially, the
company made losses but is now profitable. However, this means that accumulated
reserves are still negative (-259 AUs).
DIVIDEND
Each quarter you must pay a dividend to the parent company. This dividend consists of
two parts:


4 PERCENT OF PREVIOUS EQUITY
75 PERCENT OF NET PROFIT
From the last quarter there is a dividend of 2627 AUs due.
OTHER FUNDS
The company can borrow from the bank. However, it currently has a cash balance of 1577
AUs that is earning three percent each quarter.
OTHER EXPENSES
Head office and accounting costs amount to 1500 AUs each quarter.
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Purchasing Director
As purchasing director you are responsible for buying the products and getting the best
terms from the suppliers.
PLANNED PURCHASES
For the next quarter you are planning to purchase the following values of the product
ranges:



DOMESTIC = 24000 AUs
FASHION = 9500 AUs
CONTRACT = 8000 AUs
VOLUME DISCOUNTS
Discounts can be obtained provided more than certain amounts are purchased.
Range
Value
Discount
DOMESTIC 40000 AUs
5%
FASHION
15000 AUs
20%
CONTRACT 20000 AUs
10%
PROMPT PAYMENT DISCOUNTS
Additional discounts can be obtained if payment is made earlier than thirty days. These
discounts are as follows: Payment Discounts: Immediate payment 5%; 6 days 4%; 12
days 3%; 18 days 2% and 24 days 1%.
You are taking no discounts and pay after thirty days.
OTHER EXPENSES
The purchasing unit costs 500 AUs each quarter to run.
CREDITORS
The value of money owed to suppliers is currently 12260 AUs.
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Sales Director
As sales director you are responsible for setting the markup and forecasting sales for
each product group. Additionally, you are responsible for deciding selling costs.
MARKUPS
The markups decided for the next quarter are to be as follows:



DOMESTIC = 22%
FASHION = 75%
CONTRACT = 50%
SALES FORECASTS
Forecast sales are demand at cost and are as follows:



DOMESTIC = 24472 AUs
FASHION = 8274 AUs
CONTRACT = 8941 AUs
These are obviously forecasts and actual sales may be different from these.
SELLING COSTS
The budgeted selling cost for the next quarter is 500 AUs.
REVENUE
Budgeted sales revenue for each product group is calculated by first calculating the gross
profit (by multiplying the markup by the forecast sales). Gross profit added to forecast
sales (at purchase price).
However, this revenue will only be obtained if there are sufficient Inventory to service
demand.
DEBTORS
To make life easier, all sales are for cash!
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Operations Director
As operations director you are responsible for inventories and transportation.
INVENTORY
At the end of the current quarter the inventory values are as follows:



DOMESTIC = 11606 AUs
FASHION = 0 AUs
CONTRACT = 6445 AUs
TRANSPORTATION
Currently eleven vehicles are leased at a cost of 500 AUs each. Each of these can
transport about 4000 AUs worth of product each quarter.
OTHER EXPENSES
Besides the transportation costs you are responsible for warehousing and other staff.
These cost 5000 AUs each quarter.
BANK INTEREST
You are responsible for inventory and are being pressured to reduce them (borrowing
from the bank costs 5% each quarter).
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 1
PURCHASES
Opening Inventory
+ Gross Purchases
= Available Inventory
- Demand at Cost
- Markdowns
= Closing Inventory
Domestic
Fashion
Contract
Total
SALES INCOME
Sales at Cost
x Markup
= Gross Profit
Sales Income
Domestic
Fashion
Contract
Total
DISCOUNTS
Discount Level
Gross Purchases
x Discount
= Volume Discount
= Net Purchases
Domestic
Fashion
Contract
Total
PROMPT PAYMENT
Total Net Purchases
x Prompt Payment Discount %
= Payment Discount
CLOSING CREDITORS
Payment Days
= Fraction Remaining
x Net Purchases
= Closing Creditors
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 2
OPERATING EXPENSES
Sales Effort
+ Transportation
= Other Expenses
- Volume Discount
- Payment Discount
= Operating Expenses
CASH FLOW (sources)
Opening Cash
+ Sales Income
= Total Cash Available
CASH FLOW (uses)
Opening Overdrafts
+ Opening Creditors
+ Gross Purchases
+ Operating Expenses
+ Dividend for Parent
- Closing Creditors
= Total Cash Needed
FINANCIAL EXPENSES
Net Cash Balance
+ Interest
= Closing Cash or Overdraft
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 3
PROFIT & LOSS
Sales Income
- Sales at Cost
= Gross Profit
- Mark Downs
- Operating Expenses
- Interest
= Net Profit
- Dividend for Parent
= Retained Profit
BALANCE SHEET
Share Capital
+ Reserves
= Total Equity
ASSETS
Inventory
+ Cash
= Current Assets
LIABILITIES
Overdraft
+ Dividend for Parent
+ Creditors
= Current Liabilities
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 1 (notes on completion)
This page of notes explain where data is found, how calculations are done and
considerations
Opening Inventory - Operations Director's Brief
Gross Purchases - Purchasing Director's Brief
Available Inventory - Opening Inventory plus Purchases
Demand at Cost - Sales Director's Brief
Closing Inventory & Markdowns - Available Inventory less Demand at Cost.
Note: There can be no closing Inventory for Fashion. For Fashion the difference between
Available Inventory and Demand at Cost is disposed of as markdowns.
Sales at Cost = Demand at Cost (if there is sufficient inventory)
Markup - Sales Director's Brief
Gross Profit - Sales at Cost multiplied by Markup
Sales Income - Sales at Cost plus Gross Profit
Note: Markup is different from gross margin.
Discount Level - Purchasing Director's Brief
Gross Purchases - Purchasing Director's Brief
Discount Level - Purchasing Director's Brief
Volume Discount - Gross Purchases times Discount Level
Net Purchases - Gross Purchases less Volume Discount
Note: With the budgeted purchases, there are no volume discounts.
Net Purchases - from above
Prompt Payment Discount % - Purchasing Director's Brief
Payment Discount - Net Purchases multiplied by Payment Discount.
Note: With the budgeted payment time, there is no payment discount.
Payment Days - Purchasing Director's Brief
Fraction Remaining - Payment Days divided by the days in the Budget Period (Period Budget Brief)
Net Purchases - from above
Closing Creditors - Net Purchases times Fraction Remaining
Note: With the budgeted data, the fraction remaining is 30/91 = 0.33. Teams may have
slightly different results.
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 2 (notes on completion)
This page of notes explain where data is found, how calculations are done and
considerations
Sales Effort - Sales Director's Brief
Transportation - Operations Director's Brief
Other Expenses - various briefs
Volume Discount - from above
Payment Discount - from above
Operating Expenses - calculated from above
Note: Selling Effort is the selling costs shown on the Sales Director's brief. Transportation
will have to be calculated from the number of vehicles and the leasing cost. Other
Expenses are summed from three separate briefs (Purchasing, Operations and
Managing). This variety of sources for the other expenses should stimulate discussion! (At
this stage, it may be helpful to suggest that teams tick data as they use it.)
Opening Cash - Managing Director's Brief
Sales Income - from Work Sheet 1
Total Cash Available - sum of above
Opening Overdrafts - Managing Director's Brief
Opening Creditors - Purchasing Director's Brief
Gross Purchases - from Work Sheet 1
Operating Expenses - from above
Dividend for Parent - Managing Director's Brief
Closing Creditors - from Work Sheet 1
Total Cash Needed - calculated from above
Notes: If Opening Cash exists Opening Overdrafts must be zero and visa versa.
Net Cash Position - Cash Available less Cash Needed
Interest - Cash Position times Interest Rate
Closing Cash or Overdraft - sum of above
Notes: The Managing Director's brief shows the interest rates. The signs of the
calculation, the choice of interest rate and whether the closing position is cash or overdraft
should provide discussion!
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 3 (notes on completion)
This page of notes explain where data is found, how calculations are done and
considerations
Sales Income - from Work Sheet 1
Sales at Cost - from Work Sheet 1
Gross Profit - from Work Sheet 1
Markdowns - from Work Sheet 1
Operating Expenses - from Work Sheet 2
Interest - from Work Sheet 2
Net Profit - calculated from above
Dividend to Parent - calculated (see note).
Retained Profit - Net Profit less Dividend
Notes: The interest shown on Work Sheet 2 is the interest earned. In the Profit & Loss
Account it is interest paid - this should provoke discussion! The Dividend to Parent is NOT
the same as last year. It must be calculated according to the formula in the Managing
Director's Brief - viz. 75% of last quarter's equity (5000-259) plus 25% of Net Profit.
Share Capital - Managing Director's Brief
Reserves - calculated (see note).
Total Equity - Inventory Capital plus Reserves
Note: Reserves are the sum of the reserves last year (Managing Director's Brief) plus the
retained profit from the P & L (above).
Inventory - from Work Sheet 1
Cash - from Work Sheet 2
Current Assets - Inventory plus Cash
Notes: Ensure teams use closing values for Inventory and Cash.
Overdraft - from Work Sheet 2
Dividend for Parent - from Profit and Loss
Creditors - from Work Sheet 2
Current Liabilities - sum of above
Net Assets - Current Assets less Current Liabilities
Notes: Ensure values are closing values. Net Assets should match Total Equity. If they do
not then there has been an error.
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 1 (solution)
PURCHASES
Opening Inventory
+ Gross Purchases
= Available Inventory
- Demand at Cost
- Markdowns
= Closing Inventory
Domestic
11606
24000
35606
24472
0
11134
Fashion
0
9500
9500
8274
1226
0
Contract
6445
8000
14445
8941
0
5504
Total
18051
41500
SALES INCOME
Sales at Cost
x Markup
= Gross Profit
Sales Income
Domestic
24472
22
5384
29856
Fashion
8274
75
6206
14480
Contract
8941
50
4471
12412
Total
41687
DISCOUNTS
Discount Level
Gross Purchases
x Discount
= Volume Discount
= Net Purchases
Domestic
40000
24000
0
0
24000
Fashion
15000
9500
0
0
9500
Contract
20000
8000
0
0
8000
Total
PROMPT PAYMENT
Total Net Purchases
x Prompt Payment Discount %
= Payment Discount
41500
0
0
CLOSING CREDITORS
Payment Days
= Fraction Remaining
x Net Purchases
= Closing Creditors
30
0.33
41500
13681
© 1994 & 1999 Jeremy J. S. B. Hall
41687
1226
16638
16060
57747
41500
0
0
41500
DISTRIBUTION BUDGET
Worksheet 2 (solution)
OPERATING EXPENSES
Sales Effort
+ Transportation
= Other Expenses
- Volume Discount
- Payment Discount
= Operating Expenses
500
5500
7000
0
0
13000
CASH FLOW (sources)
Opening Cash
+ Sales Income
= Total Cash Available
1577
57747
59324
CASH FLOW (uses)
Opening Overdrafts
+ Opening Creditors
+ Gross Purchases
+ Operating Expenses
+ Dividend for Parent
- Closing Creditors
= Total Cash Needed
0
12260
41500
13000
2627
13681
55706
FINANCIAL EXPENSES
Net Cash Balance
+ Interest
= Closing Cash or Overdraft
3618
109
3727
© 1994 & 1999 Jeremy J. S. B. Hall
DISTRIBUTION BUDGET
Worksheet 3 (solution)
PROFIT & LOSS
Sales Income
- Sales at Cost
= Gross Profit
- Mark Downs
- Operating Expenses
- Interest
= Net Profit
- Dividend for Parent
= Retained Profit
BALANCE SHEET
Share Capital
+ Reserves
= Total Equity
ASSETS
Inventory
+ Cash
= Current Assets
LIABILITIES
Overdraft
+ Dividend for Parent
+ Creditors
= Current Liabilities
57747
41687
16060
1226
13000
-109
1942
1646
296
500
37
5037
16638
3727
20365
0
1646
13681
15328
© 1994 & 1999 Jeremy J. S. B. Hall