Green Pastures Financial Analysis And Budgeting
Green Pastures Financial Analysis and Budgeting
The case involves Green Pastures, a 400-acre horse boarding operation situated near Kentucky Bluegrass, which specializes in boarding broodmares and foals. The industry faced a downturn in 2017 due to declining breeding activities, prompting increased competition. In response, Green Pastures planned to enhance client entertainment, increase advertising, and absorb certain expenses such as veterinary and blacksmith fees, aiming to maintain competitiveness.
The static budget for 2017 anticipated 21,900 boarding days at a rate of $25 per mare, with variable costs per mare per day including feed at $5, veterinary fees at $3, blacksmith fees at $0.25, and supplies at $0.55. All other expenses, such as fixed or semi-fixed costs, were also incorporated. During the year, management made decisions not to replace a worker who quit in March but invested in advertising and client entertainment to stay competitive.
The actual results revealed lower activity, with 19,000 boarding days, impacting revenues and costs. The actual income statement shows a net loss of $149,170, in contrast to a budgeted net income of $170,780. Variances in costs and revenues are analyzed through flexible budgeting techniques, which adjust static budget figures to reflect actual operational levels.
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Analysis of the Static Budget and Causes of Variance
The static budget forecasted a net income based on 21,900 boarding days, totaling $547,500 in sales at $25 per day. The actual boarding days were only 19,000, which reduced total sales to $475,000. This variance alone accounts for a decrease of $72,500 in sales revenue, representing roughly a 13.2% shortfall compared to budget expectations. This decline was primarily attributable to the industry downturn that reduced demand for boarding services, signifying the primary cause of the net income loss.
Despite the lower boarding days, management’s effort to control expenses was mixed. Variable costs such as feed, veterinary, blacksmith, and supplies were also affected due to fewer boarding days. The actual feed costs were $104,390, but the flexible budget based on 19,000 days at $5 per day would have been $95,000, indicating an unfavorable variance of $9,390. This suggests management did not effectively control feed costs, possibly due to inefficiencies or increased prices. Similar patterns are observed for veterinary, blacksmith, and supplies costs, with actual expenses exceeding the flexible budget figures, further pointing to expense management issues.
Fixed expenses, including depreciation, insurance, utilities, repairs and maintenance, labor, advertising, and entertainment, remained relatively stable. The actual fixed costs were close to budgeted figures, with minor variances such as utilities costing $2,000 more and repairs and maintenance $1,000 higher, possibly due to increased maintenance needs or inefficiencies. Overall, expense control was average at best, with some costs exceeding expectations while fixed costs remained fairly consistent.
Management’s decisions to stay competitive by increasing advertising and client entertainment, despite declining boarding days, reflect a strategic effort to maintain market presence. However, the financial impact shows that these initiatives did not translate into increased revenue, leading to the overall net loss. Consideration of alternative strategies, such as adjusting pricing or offering discounts, might have mitigated some revenue loss or attracted more clients.
Preparing the Flexible Budget and Its Impact
The flexible budget recalibrates expected revenues and expenses based on actual operational levels—here, 19,000 boarding days. It allows a more accurate comparison between expected and actual results, isolating variances attributable to volume and pricing adjustments.
Using the given data, the flexible budget for sales is calculated as 19,000 days multiplied by $25, resulting in $475,000—matching actual sales. Variable expenses are scaled accordingly: feed at $5 per day equals $95,000, veterinary at $3 per day totals $57,000, blacksmith at $0.25 per day equals $4,750, and supplies at $0.55 per day sum to $10,450. Summing these yields a total variable expense of $167,200, which is used to determine contribution margin.
Comparing actual variable costs with the flexible budget indicates variances that reveal management’s control levels. The actual feed expense of $104,390 shows an unfavorable variance of $9,390, and veterinary, blacksmith, and supplies costs also exceeded their flexible budget figures, indicating some inefficiency or increased prices during the year.
Fixed expenses stay constant in the flexible budget at the static budget levels, serving as baseline costs. The actual fixed expenses, with minor variances, slightly differ from static budget assumptions but do not significantly impact overall financial analysis.
Assessment of Management's Performance Based on Budget Variances
Using the flexible budget allows a more precise evaluation of expense control. The unfavorable variances in variable costs, especially feed, imply that management did not manage supplies optimally or faced increased costs beyond control. The cost overruns might reflect price increases from suppliers or inefficiencies in feeding practices.
Despite revenue decline, fixed costs remained largely under control. However, the overall financial loss underscores that management's strategies were insufficient to offset the contraction in demand. Their proactive measures, such as advertising and client entertainment, although beneficial for brand presence, did not produce immediate revenue gains, highlighting the challenges of navigating industry downturns with increased expenses.
Strategic Recommendations for Green Pastures
To improve financial performance, Green Pastures should consider multiple strategic actions. First, reevaluating pricing strategies could be vital—raising prices slightly might compensate for decreased boarding volume, provided the market can bear higher charges. Conversely, lowering prices temporarily might attract additional clients, increasing occupancy and improving income flow, especially if competitors cut prices.
Second, operational efficiencies should be prioritized. For example, negotiating better supplier contracts for feed and supplies, optimizing feeding schedules, or reducing waste could lower variable costs. Implementing stricter expense controls and periodic audits can also ensure expenses do not escalate unnecessarily.
Third, diversifying services can add revenue streams. Offering specialized training, event hosting, or premium boarding options could appeal to more clients. Enhancing marketing efforts tailored to specific customer segments or geographic areas can also attract more business without necessarily increasing fixed costs.
Furthermore, management must balance their marketing and client entertainment spending with actual business results. Data-driven decision-making, including regular budget vs. actual comparisons and industry benchmarking, can inform future strategies more effectively.
In conclusion, Green Pastures’ scenario exemplifies the importance of dynamic budgeting techniques like flexible budgets to accurately assess performance and guide decision-making. Management’s current approach, while proactive in marketing, needs to be complemented with cost efficiencies and pricing strategies that respond to the market conditions. Embracing a comprehensive, data-informed approach will support sustainable growth in a highly competitive environment.
References
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- Additional references would include industry-specific reports, recent articles on equine business management, and financial analysis textbooks relevant to budgeting and variance analysis.