Reference no: EM132986558

Assessment - Project - Monitor and evaluate financial management approaches

Scenario

This is a continuation of the scenario in Assessment 2.

It is the end of Q1 of 2021, and the company has suffered more losses due to government lockdowns being extended.

The initial lockdown was extended until 12th July. Endurance Fitness resumed in-person classes on 13th July.

However, due to a surge in the number of new COVID-19 infections in Victoria, gyms were forced to shut their doors once again on 12th August.

It is expected that Endurance Fitness can commence in-person classes once again on 5th October.

Impact on income

In Q1 of 2021, the company's income was affected as follows:

• Total income was only 20% of the budget forecast in the contingency plan.
The company continued to market the virtual membership ($50 per month, month-month) and saw a promising market for it. The sales performance of virtual memberships in Q4, 2020 indicate that virtual memberships can be marketed more aggressively and will generate income.

The company continued the equipment rental program and generated higher income than the previous quarter. This suggests that the equipment rental program can remain a steady source of income for the company throughout the COVID-19 crisis.

• The company acquired the following corporate clients, who purchased virtual memberships
for their employees working from home:
Archer Tech - 15 memberships
JP Engineering - 10 memberships
Inpharma - 20 memberships

In Q1, expenses were affected as follows.

Trainers were rostered as per the contingency budget prepared in Assessment 2. However, they had to be compensated for their shifts being unexpectedly cancelled in August.
• The company continued their paid subscription to the video conferencing software, for virtual memberships.
• Bank fees were significantly waived as a COVID-19 response.
The company successfully negotiated a rent reduction of 15% for the next 6 months. They do not expect rent to be reduced any further.

Part A: Monitor budget and report on effectiveness of financial management systems

You are Arvin Krishnan, the Finance Manager of Endurance Fitness.
You are reviewing the budget at the end of the quarter, as per company policy. Analyse the following financial statements for Q1 of 2021:
• Appendix F: Endurance Fitness 2021 Q1 P&L Actual
• Appendix G: Endurance Fitness 2021 Q1 Cash Flow Statement
• Appendix H: Endurance Fitness 2021 Q1 Accounts Receivable Ageing Summary
• Appendix I: Endurance Fitness 2021 Q1 Balance Sheet

Then, prepare a formal report of the financial situation for the management team. In this report, you must cover the following:
1. Overview of issues
• Identify and prioritise at least two significant issues in the financial statements for Q1 and the remainder of the forecast budget for 2021.

2. Budget variances
• Calculate variance, and in the table format below, identify the income line items with the most significant variances (+ or -)

• Calculate variance, and in the table format below, identify the expense line items with the most significant variances

• discuss the impact of the variances on the company's financial position
• identify four areas of the budget that need to be reviewed with highest priority, and suggest how they should be modified for the next three quarters

3. Financial management processes
• analyse the effectiveness of existing financial management processes that were used to prepare the budget forecast for 2021 - i.e. what were two key inefficiencies in the financial management policy and process that you used?
• make recommendations for four improvements to the financial management policy and process in order to ensure:

effective forecasting during the COVID-19 situation
effective maximisation of profits during the COVID-19 situation
effective monitoring of finances and cost control for the COVID-19 situation
effective management of accounts receivable for the COVID-19 situation

Use the numbered sections above to create sub-headings for your report.

Part B - Modify financial contingency plan

Scenario

The recommendations you made in your report (in Assessment 3, Part A) have been accepted by the management team.

The team has also agreed to the following tactics to control costs and maximise profits:

• temporarily stop the following membership options/ income streams, from Q2 - Q4 2021:
o Full membership - 12 months
o Full membership - 6 months
o Full membership - 3 months
o Month to month - all classes
o 10 class pass
o Weekly drop in/ visitor
o Daily drop in/ visitor
o Personal training
o Retail sales

for Q2 - Q4, 2021, forecast income only from the following streams:
Month to month - 3 classes per week (in-person), reduced by 80% of previous forecast $50 Virtual month to month membership - increase forecast by 50% Equipment rental income - maintain forecast

cut all retail stock and merchandise related expenses, as well as training expenses all managers to take pay cuts monitor finances and COVID-19 situation weekly (with the exception of utilities which are to be monitored quarterly), to ensure timely contingency planning

Furthermore, the management has made an important decision to downsize operations by closing the Airport West facility.

The lease of the Airport West facility is renewed annually in October. However, it will now not renewed in be 2020.

All members at Airport West will continue to be offered virtual memberships.

All equipment at Airport West will be sold. It is estimated that, with depreciation, this will generate a cash injection of $70,000 to the business.

This change means that the budget will need the following changes:

reduce rent expenses by 40%
reduce payroll by 70%
reduce consumables and utilities expenses by 75%
maintain all other expenses as they are

Task

Based on the contingency measures agreed with the management team (as given in scenario above) as well as your understanding of the financial situation and unpredictable economic environment you must now modify and update the financial contingency plan you had initially prepared (in Assessment 2, Part C), to implement and monitor the changes you have agreed with the team.

1. Modify the Financial Contingency Plan you had prepared (using the template in Appendix
E) as follows, for Q2 - Q4, 2021:
maximise profits that you have agreed
update monitoring methods for strategy
update changes to budgets
identify two resources required to implement contingency plan (such as human resources, technology, etc.)
update methods of staff support required to implement contingency plan (such as access to specialist advice, peer support, etc.)

identify at revised contingency plan, and against each action, its priority, monitoring method, monitoring frequency, and the person responsible for implementing it

If no change is required to an element, you may leave it as you had originally written.

2. Using the template in Appendix D, adjust the 2021 budget quarterly breakdowns for Q2 - Q4 2021, based on the shortfall percentage you have agreed with the team (see scenario above).

You must also add or remove any line items necessary, based on your revised contingency plan.

The Microsoft Excel template contains most of formulae you require for the budget calculation.