BUSS2 - Finance

Budgets
1. Uses of a Budget
  1. Control finances
  2. Improve employee performance
2. Types of Budget
  1. Expenditure
    1. Plan of future expenses of a business/cost centre.
  2. Delegated
    1. Specific manager to control. They also may help to determine size.
  3. Income
    1. Sales revenue target for department/whole business.
3. Budgetting Drawbacks
  1. Conflicts can arise.
    1. Departments fighting for funding.
    2. Short Term Cuts - Promotion leads to long-term issue - shares fall as result.
  2. Motivating impact of budgets fail to be achieved.
    1. Too ambitious = 'IMPOSSIBLE' = Fails to motivate
    2. If theres no change to have staff input.
4. Key Terminology
  1. Cost Centre
    1. Section of a business that incurs expenses.
  2. Profit Centre
    1. Section of a business incurring expenses & generating revenue so profit can be calculated & profit budget set.
5. Variances
  1. Variance = Difference between budgeted figure and figure achieved.
  2. Variance Analysis: Comparison by organisation of actual performance with its expected budget performance over a certain time period.
  3. Favourable Variance: Change from budgeted figure leading to a HIGHER than expected figure.
    1. Possible Causes: Lower interest rates - Leading to higher sales income. / Bad publicity for competitor(s). / Higher exchange rates = Imported goods become cheaper.
  4. Adverse Variance: Change from budgeted figure leading to a LOWER than expected figure.
    1. Possible Causes: Competitors offering a special deal. / Staff efficiency falls = Higher cost per unit. / Oil price increasing energy costs. / Rent increased - enforced by property owner.
Cash Flow
1. Key Terminology
  1. Creditors: Suppliers owed money by the business - credit purchase.
  2. Credit Control: Monitoring debts to ensure credit periods are not exceeded.
  3. Bad Debt: Unpaid customer bills that are now very unlikely to ever be paid.
  4. Overtrading: Expanding a business rapidly without obtaining all necessary finance.
2. Cash Flow Issues
  1. Lack of planning
  2. Poor credit control
  3. Allowing customers too long to pay debts
  4. Overtrading
  5. Unexpected Events
3. Cash Flow Improvements
  1. INCREASE INFLOWS - REDUCE OUTFLOWS
  2. Overdraft: Flexible loan - Interest Rates/Fees
  3. Short-Term Loan: Fixed Amount - Fixed Time, Interest
  4. Sale of Assets: Boosts Cash - Low Price/May be required later date.
  5. Sale & Leaseback: Costs adding to overheads / Profit lost if price rises.
  6. Reduce customers credit terms: CF bought forward - put customers off.
Measuring & Increasing Profit
1. Key Terminology
  1. Profit Margin: Profit made as a proportion of Sales Revenue.
  2. Gross Profit: Calculated by subtracting 'variable costs' from 'sales revenue'.
  3. Net Profit: Calculated by subtracting 'total costs' from 'sales revenue'.
  4. Return on capital: Proportion that 'net profit' is of 'capital invested' in the business/project.
2. ROCE: Can be increased by... 1.Increasing profitability without investing more capital. / 2. Attempting to make same profit level with less expenditure.
3. Cash Flow Vs. Profit
  1. Cash Flow: Money that 'flows' in and out.
  2. Profit: What remains from 'sales revenue' after subtracting 'expenses'.
  3. For a small business, CF is likely to be more important. They may have a profit, but a negative CF can result in an inability to pay bills.
4. Methods of increasing profit
  1. Increase sales without reducing 'net profit margin'.
  2. Increase NPM by reducing VC p.unit
  3. Increase NPM by increasing price.
  4. Increase NPM by reducing FC.

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BUSS2 - Finance

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