section c

what is a budget?

target that an enterprise aims to reach over a given period of time

what is a revenue budget?

sets a minimum target for revenue received

what is an expenditure budget?

sets a maximum target for money spent by the enterprise

what is capital expenditure?

money spent buying fixed assets like machinery and vehicles

what is a cash budget?

a budget set for the maximum amount of cash they want to hold or the minimum amount of cash they want to have available

what is a labour budget?

a budget for the maximum they want to spend on labour - wages/salaries

what is a marketing/promotion budget?

maximum a business spends on their marketing

what is an overheads budget?

necessary to keep the enterprise running - costs for rent/insurance/utilities

what is a production budget?

how many units of a product must be produced to make the revenue budget

what is a purchase/materials budget?

covers the cost of raw materials the enterprise needs to produce their products/services

what is budgetary control?

budgets make clear how much they can spend and how much revenue they are aiming to achieve - checks whether they are on track. checking actual performance against what was planned is budgetary control

what is variance?

difference between the budgeted figure and the actual figure

what does a favourable variance lead to?

higher than expected profit

what is adverse profit?

lower than expected profit

how does income and revenue cause an adverse variance?

actual revenue is less than the budgeted revenue - caused by not selling as expected so not gaining planned amount of money

how does income and revenue cause a favourable variance?

actual revenue is more than the budgeted revenue - caused by selling more than expected so gaining more than planned

how do expenditures cause an adverse variance?

actual expenditure is more than the budgeted expenditure - possibly caused by rise in costs or not producing product as efficiently as planned

how do expenditures cause a favourable variance?

actual expenditure is more than the budgeted revenue - cheaper supplier or raw materials, more efficient way of producing

what is cash flow?

the money flowing in and out of an enterprise

what are the 2 different types of cash flow?

inflows (coming into the business)
outflows (going out of the business)

what is a cash flow forecast?

prediction of the cash inflows and outflows for an enterprise over a period of time

what are total inflows?

money that flows into the enterprise - includes revenue and loans

what are total outflows?

money spent by an enterprise

what are net inflows/outflows?

total inflows - total outflows → the difference between how much an enterprise makes and how much they spend

what is an opening/closing balance?

amount in the bank at the start/end of a period

what is opening balance in a cash flow forecast?

the same as the previous month’s closing balance

how do you calculate the closing balance in a cash flow forecast?

opening balance + net cash flow

what do you assume the opening balance is if it is not given in a cash flow forecast?

0

what do businesses use cash flow forecasts for?

to identify money coming in and going out of the enterprise over time
to determine positive and negative liquidity and make business decisions

what is there a risk of if a business predicts a cash deficit?

not being able to cover their expenses

what is an impact of negative cash flow?

the enterprise may not be able to pay for promotion so it could lose sales

how could a business improve their cash flow problems?

increase revenue
sell of unused assets
reduce credit periods for customers

what is a cash deficit?

if more money goes out than comes in

what is a cash surplus?

if more money comes in than goes out

what is the problem with increasing revenue to improve cash flow?

difficult to do without spending more on stock/advertising/promotion

what is the problem with selling off unused assets to improve cash flow?

unlikely for an enterprise to have valuable assets doing nothing

what is the problem reducing credit periods for customers to improve cash flow?

customers may not think the enterprise if offering a good deal and may go elsewhere next time

when does the break-even point occur?

revenue and expenditure are exactly the same - 0 profit

when does profit occur?

after the break-even point when total revenue is greater than total cost

when does loss occur?

before the break-even point when total costs are greater than total revenue

what is the break-even point (BEP)?

number of items the business needs to sell to cover all their expenses and make exactly 0 profit

what is BEP measured in?

units

what is the formula for BEP?

fixed costs / selling price - variable cost per unit

what is the BEP on a break-even chart?

where the total costs line crosses the total revenue line

what is the margin of safety?

the difference between the BEP and estimated sales (actual or expected sales - BEP)

what does a break-even analysis show?

how many products an enterprise must produce and sell before they can start to make a profit

what are the strengths of a break-even analysis?

fixed and variable costs are identified
owner knows how many products need to be sold to make a profit
realistic price can be set for goods and services

what are the risks of not using a break-even analysis?

costs remain unknown or too high
selling price may be too low to cover costs
margin of safety is unknown meaning the enterprise could be vulnerable to a dip in sales

what are limitations of a break even analysis?

shows how much the business needs to sell, not how much they actually will sell
can be complicated if the enterprise sells more than one product
assumes all the output is sold

why do enterprises need sources of finance?

if a business is struggling it may need finance to meet its day-to-day running costs
may need finances to expand

what are the 3 sources of finance?

personal sources
retained profits
sale of assets

what are internal sources of finance?

money from the enterprise and money that an entrepreneur may raise against their own name to put into the business

what are the 3 types of personal sources of finance?

savings
credit cards
friends and family

what are adavantages of savings as a source of finance?

no interest
entrepreneur gets more than their savings back if successful

what are disadvantages of savings as a source of finance?

risk of losing savings
not having a lost of savings

what is the advantage of credit cards as a source of finance?

easy and quick

what is the disadvantage of credit cards as a source of finance?

very expensive interest payments

what are advantages of using friends and family as a source of finance?

quick and easy
no/low interest

what are disadvantages of using friends and family as a source of finance?

have to find someone willing to lend
may fall out with lender if you don’t pay them back

what are retained profits?

profits kept in the enterprise that can be reinvested for future growth

what are advantages of retained profits as a source of finance?

no interest
no repayments

what is the disadvantage of retained profits as a source of finance?

only have these if business has been successful

what are advantages of sale of assets as a source of finance?

no interest
no repayment

what are disadvantages of sale of assets as a source of finance?

may take a long time to sell
may have no valuable, unused assets

what are long term sources of finance?

need to be paid back over a long period of time

what are examples of long-term sources of finace?

mortgages
share capital
new partners

what are mortgages?

large, long-term loans secured against property
lower interest rates that other options
property at risk of repayments aren’t met

what is share capital?

shares are sold to investors when a company becomes a private limited company
investors become partial owners and may contribute expertise
dilution of ownership and dividends must be paid to shareholders

what is taking on new partners?

similar to share capital but company doesn’t have to be private limited
new partner brings new capital/expertise
profits/decision-making must be shared so careful selection is crucial

what are medium-term sources?

takes years to pay back

what are examples of medium-term sources?

hire purchase (HP)
loans
leasing
business angels
peer-to-peer lending (P2P)

what is hire purchase?

allows businesses to use assets without significant upfront costs
enterprise can purchase asset at end of agreed period
ideal for acquiring equipment/vehicles but higher overall cost due to interest

what are loans?

borrow money for a purpose
fixed interest rate for predictable payments
enterprise must be sure it can afford monthly repayments - bank can rep

what are business angels?

experienced entrepreneurs invest funds/give guidance to new business owners
less formal than banks/large investors
can be challenging to find so don’t work for everyone

what is peer-to-peer lending (P2P)?

direct lending from individuals without use of a bank
websites that allow investors to meet/lend money to entrepreneurs
interest rates can be lower but arrangement feed can add up

what are short-term sources?

paid back quickly

what are examples of short-term sources?

bank overdraft
crowdfunding
trade credit

what is bank overdraft?

allows more money to be withdrawn from an account than is actually in it
can borrow money for exact period of time so useful for cash flow deficits
amount borrowed is usually low and interest rate is higher than bank loan

what is crowdfunding?

raising money from large number of people who give a small amount
done on internet with a fee
success not guaranteed and have to advertise to see if anyone will invest - people can steal idea
money doesn’t need to be repaid

what is trade credit?

agreements with suppliers allowing businesses to get materials immediately but pay later
improves cash flow in short term
strained relationship with suppliers if payments aren’t made when agreed

what are government and charitable grants?

grants for specific purposes that don’t need to be repaid
support businesses in line with government/charitable goals
if enterprise meets criteria - often strings attached like specific project requirements

what 4 factors affect choice of finance?

size and type of company
amount of money needed
length of time
cost of the finance

how does the size/type of company affect the choice of finance?

not all companies have access to all types of finance - some may not have assets to sell, small business finds it harder to get a loan

how does the amount of money needed affect the choice of finance?

small amounts usually come from internal sources. larger amounts require external sources

how does the length of time affect the choice of finance?

using savings/arranged overdraft from bank are common ways to see a business through short-term lack of finance

how does the cost of finance affect the choice of finance?

some are more expensive than others as money paid back requires interest