Finance
Flexible Budget for Yum Brands Inc.
Flexible budgeting allows a firm to look at different potential scenarios, often this may be undertaken for an optimistic, pessimistic and most likely scenario. Firms will often ; these may be based on complex approaches to assess likely demand, for example, considering past patterns of sales, the impact advertising they will have and other factors such as the influence of the economic climate, competition and social factors. However, forecasts are unlikely to be fully accurate, the development of a flexible budget allows the firm to look at different scenarios, and create a more flexible approach towards planning. This can be particularly important when the firm is planning for a longer period of time, such as a full financial year, this can be seen by preparing a flexible budget for a . Yum! Brands is a large corporation which develops, operates and franchises a wide range of restaurants, including KFC, Taco Bell and Pizza Hut. The firm may be argued as particularly sensitive to economic influences as the products and services sold are subject to discretionary spending, and heavily influenced by the level of disposable income, and social fashions and trends and the actions of competitors.
Looking at Yum Brands to prepare a flexible budget one may first look at the sales patterns. With revenues (all figures are in millions) of $11,343 for 2010, $12,626 for 2011 and $13,633 there is a pattern of growth. The average growth for the last the years has been 7.95%, this was reflected in the 2012 figure, which saw growth of 7.98% year in year. However, not all years have been so consistent; 2010 saw only a 4.68% increase on the previous year and 2011 was an increase of 11.21% on 2010. For a flexible budget the average of the last three years may give a most likely scenario, assuming an increase in line wit that average. Yum Brands is a firm that is committed to growth, and investment is being made to trey and increase sales. An optimistic approach may be to take the 11.31% as a base line for the highest growth expected. For the pessimistic growth one may look at the most recent quarter, where the firm has recorded a 2.89% decrease in revenues. The firm may have a good history of growth, but in some difficult years there has been a decline, the latest quarter has not been the only period of declining revenues, in 2008 ( a year of the recession) there was a decline of 3.93% on the previous year. For the pessimistic budget the current decline will be assumed to last for the full year. It may be argued that as other firms, such as McDonalds (who also saw a decline in revenues in 2008) are not seeing the same decline (they showed a 2.39% increase in the same quarter), so this may not be an industry trend (McDonalds, 2014). Indeed, with the current U.S. economy growth rate showing 4.1% (Trading Economics, 2014), the firm may be able to benefit from increased demand with increased levels of disposable income.
The cost of goods sold has remains fairy consistent in terms of the percentage costs; cost of goods sold were 72.3% in 2012, 72.4% in 2011 and 71.6% in 2010. As some costs have increased over the last few years, such as oil, the latest cost of goods of 72.3% of revenues will be used for all scenarios.
The cost of sales and admin increased at a rate faster than revenue growth in 2012, rising at 8.31% accounting for 12.05% of sales. The increased costs of employment may seen increasing, to allow for this all scenarios will allow cost of sales and admin to be 13% of sales. The interest payments will be assumed to remain ($149) the same in the optimistic and most likely scenario. However if the , there may be an increase in interest rates, to allow for this, $160 is allowed for interest in the pessimistic scenario. The last consideration is the allowance for taxes. Taxes may increase or decrease. The current rate seen in the accounts is 25% of the net revenues before taxes; this will be assumed to remain the same in the most likely scenario. When tax rates are changed, it is usually by 1% at a time, so the optimistic scenario will assume a 1% decrease in tax rates, whole the pessimistic scenario will assume a 1% increase. The flexible budget, prepared using these assumptions, is presented below.
Table 1; Flexible budget
2012
Optimistic (revenues increase by 11.31%)
Most likely (revenue increase by 7.95%)
Pessimistic (revenues decrease by 2.89%)
Revenue
13,633
15,175
14,717
13,239
Cost of goods sold
9,852
10,971
10,640
9,572
Gross profit
3,781
4,203
4,077
3,667
Sales and admin
1,643
1,973
1,913
1,721
Other costs (revenues)
-156
0
0
0
Operating profit
2,294
2,231
2,163
1,946
Interest expenses
Income before taxes
2,145
2,082
2,014
1,786
Allowance for taxes
Net profit after taxes
1,608
1,582
1,511
1,322
This may be used by the firm to assess the conditions which are emerging and as a tool not only to assess but also control, comparing performance against the different types of budget and identifying where there are differences in any given scenario in order to investigate and improve performance. With an understanding of the potential outcomes of different scenarios the firm may also take proactive strategies to improve performance, for example looking for cost cutting measures before they are needed or deciding to increase marketing to stimulate demand in case of a decline in demand.
When using the flexible budgets it should be realized that they have been developed with the aim of allowing for different scenarios, so they will not be accurate, but will provide only a guideline, which may be updated as environmental factors emerge.
References
McDonalds, (2013), Shareholder Information, accessed http://www.aboutmcdonalds.com/mcd/investors/shareholder_information.html on 4th Jan 2014
Trading Economics, (2014), U.S. GDP Growth Rate, accessed http://www.tradingeconomics. on 4th Jan 2014 from Yum! Brands Inc., (2013), 10-k for 2012, Yum Brands Inc.
Yum! Brands Inc., (2011), 10-k for 2010, Yum Brands Inc.
