Examine Apple’s flexible budget over a three year period

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FLEXIBLE BUDGETING1


Introduction

This paper will provide researched information on Apple’s, Inc flexible budget over a three year period showing their growth rates. It will explain the company’s budget showing the low, the average, and the high revenues expenses. Provide information on the how competitors fare and on Apple’s provision taxation outlook.

Budgeting is one of the most important internal business activities. The budget preparation model typically involves an attempt to accurately forecast revenues and sales within a future period of time. A solid budget should first be a realistic projection that is based upon internal business and macroeconomic trends. The following paper provides an example of a flexible budget using the company; Apple, Inc. Apple (2014) is a multinational consumer electronics company that delivers innovative products to markets all around the world.

The budget is illustrated in Table 1. The first step in developing the budget was to first get a perspective on where to start. The starting point for any budget is to get obtain historic financial information to extend into the future. As such, Table 1 indicates three previous reporting cycles of Apple’s Income Statement using the absorption costing approach. Absorption costing is used in this example as it is required as part of Apple’s reporting and it ties direct expenses to revenues. As such, the cost of goods sold includes direct labor and manufacturing overhead that are directly related to manufacturing the product, and therefore, total revenues. In addition, indirect expenses, such as selling, general, and administrative and research and development are considered indirect expenses and are not included in the cost of goods sold.

The first consideration in extending the flexible budget outside of historic trends is to take a look at the growth rate of the company’s sales revenues over time. Apple has experienced an average revenue growth rate of 28.94% annually over the three years reported. This is a strong indicator of financial health and illustrates the company’s ability to continue to bring new and innovative products to market on a consistent basis. It also provides insight into Apple’s unique ability to consistently satisfy its customer base as well as attract new customers to the existing loyal customer base. Apple also has key products in research and development as well as products ready to unveil next year into the market. As such, the average growth rate has been extended to next year’s average column on the flexible budget. Therefore, sales revenue should be in the ballpark of just over $220 billion. An extraordinary year could bring in as much as $242 billion while a particularly sluggish performance would yield $198 billion. The only real concern in having a sluggish year would be a poor overall performance of the American markets, if they were to sink into a recession.

The direct absorption expenses are illustrated in the company’s cost of goods category. Of notable concern is the slightly shrinking gap between revenues and gross profits. This is a result of the cost of goods sold slightly outpacing revenue growth over the previous years. Table 1 illustrates this behavior as revenues have grown, on average, only 28.94% while the cost of goods sold has increased, on average, 32.73%. The overall impact on the gross margin has been an overall growth rate of 23.38%. While this gross margin growth is still extraordinary in terms of performance, there remains a trend of direct costs outpacing revenues. If this continues it will eventually become a concern. In terms of comparing this growth to the growth rate of the overall economy, Apple is vastly outperforming all U.S. economic indicators. The best indicator for economic growth is the measure of output, or gross domestic product. According to the Bureau of Economic Analysis (2014) the GDP growth of the U.S. during the same time Apple is being evaluated (2011-present) was never more than 5%.

There are some macroeconomic and environmental concerns that have to be carefully watched. A quick environmental analysis shows that competition is arguably the largest threat to the consumer electronics industry. According to Hubenthal and Burr (2008) constant change and the development of innovative products is essential for the survival of any company operating in this business sector. Apple has to compete with other industry giants such as Samsung, Microsoft, and Google. These are all fierce competitors; however, they have been involved with the electronics industry during the previous years when Apple has experienced tremendous growth. As such, Apple will need to continue to invest in indirect expenses such as advertising and research and development to retain its loyal consumer base. Another consideration is the corporate tax rate that has been a constant presidential target. The rate of taxation that Apple is exposed to has growth over the previous 3 fiscal reporting cycles. The tax rate has been 24%, 25%, and then 38% last year. As a result, the tax provision has increased faster the net income, further decreasing profits that can be paid as dividends or held in retained earnings. Overall, the amount has increased over the observed years, however, the percentage margin has gotten smaller due to the tax rate applied to corporate income.

The preparation and availability of a flexible budget can be beneficial to several parties. First, investors can prepare flexible budget in order to predict the future health of the company. Furthermore, this type of information is valuable to investors because it can place them a step ahead of other investors who are simply responding to news media outlets. The nature of a flexible budget can give an investor a good idea how much income is remaining for paying dividends, reinvesting in opportunities, or simply holding cash in reserve as a retained earnings. Second, business executives need this information to make informed decisions about operational strategies. A flexible budget can offer several advantages over the static budget approach. The flexible budget is able to reflect changes in the operational environment that could have never been predicted (Garrison, Noreer & Brewer, 2001). It can therefore be changed in the middle of the reporting cycle fairly easily and still hold department heads and executives accountable to make decisions within the scope of health financial conditions for the company. The static budget is fixed, and by definition the opposite of “flexible.” This budget is made well in advance and cannot be changed during the reporting period. Changing operational factors can potentially render the static budget completely useless for management. In closing, flexible budget are great tools for both planning and control. The flexible budget predicts the future health of an organization and allows management to begin planning for operations and strategy. The flexible budget also allows for flexible control during the accounting cycle by accurately reflecting environmental constraints and new operational opportunities and challenges. The flexible budget can also be tied to the performance of management. For example, strong revenue performance within the scope of the uppermost limits of the budget can be a target that is tied to the uppermost pay increases for management. Also, if the company does poorly in regards to revenues, falling into the low category, a much lower performance measure and payout is warranted. Overall, the flexible budget gives a company the tools it needs to adapt and change to the environment in which it operates in real time.

Table 1

Apple

Income Statement

Reported

avg growth

Flexible Forecasting

2011

2012

2013

2014-High

2014-Avg

2014-Low

Revenue

108,249

156,508

170,910

28.94%

242,414

220,376

198,339

COGS

64,431

87,846

106,606

32.73%

155,647

141,497

127,347

Gross Profit

43,818

68,662

64,304

23.38%

87,269

79,336

71,402

Selling, Gen & Adm

7,599

10,040

10,830

21.26%

14,446

13,132

11,819

R & D

2,429

3,381

4,475

42.12%

6,996

6,360

5,724

EBITDA

36,538

60,128

58,664

30.28%

84,069

76,426

68,784

Depreciation

1,814

3,277

6,757

136.25%

17,559

15,963

14,367

Operating Income

33,790

55,241

48,999

22.51%

66,029

60,026

54,024

Interest Income

519

1,088

1,616

105.68%

3,656

3,324

2,991

Pre-Tax Income

34,205

55,763

50,155

23.32%

68,034

61,849

55,664

Tax Provision

-8,283

-14,030

-13,118

29.19%

-18,641

-16,947

-15,252

Net Income

25,922

41,733

37,037

21.44%

49,475

44,977

40,480

References

Apple. (2014). About. Retrieved from http://www.apple.com/about/

Bureau of Economic Analysis. (2014). “U.S. GDP Historic Data.” Retrieved from

http://www.bea.gov/national/index.htm#gdp

Garrison, Noreer & Brewer. (2001). Managerial Accounting. McGraw Hill. Retrieved from

http://www.mcgrawhill.ca/college/garrison5/graphics/garrison5mag_student/slideshow/sl

d11.pdf

Hubenthal & Burr. (2008). “Competitive Strategy for Consumer Electronics Industry Leaders.”

Retrieved from https://innovationscientific.com/wp-content/uploads/consumer-electrncs-

asset-C9730E622821.pdf

Morningstar Financials. (2014). “Apple Income Statements.” Retrieved from

http://financials.morningstar.com/income-statement/is.html?t=AAPL

References

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