U3 P1

What is the definition of a budget? Adv and Disadv

Forecast or plan for the future finances of a business

Income, expenditure and surplus/deficit (profit)

Adv	Disadv
Quantifiable target to measure outcomes	Potential conflict (short term saving bad for long term goals)
Informs decision making Motivated bc of responsibility	May be restrictive Time consuming to set & monitor

What is an income budget?

How can it be used, how is it made?

A target set for the amount of revenue to be achieved in a set time period

• Can be split by products, services or departments

• Can be translated into sales targets for individual staff

• Informed by market research and sales froceasts

• Informs predicted cash flow for cash flow forecast

What is an expenditure budget?

A limit placed on the amount to be spent in a given time period

• Can be split by department, function or product

• Delegate responsibility to managers

• May be separate budgets for start up and running costs

• Informs predicted outflows in cash flow forecast

• Allows monitoring of over / under spending

Underspending can cause demotivated staff or failing equipment

What is a profit budget?

A target set for the surplus between income and expenditure in a given period of time.

• Calculated based on income & expenditure budgets

• Can be split into departments or be whole

• Used to inform decision making on products to include in the businees portfolio or make cuts.

What to look for when interpreting budgets for cashflow problems

• Need sufficient cash to meet running costs

• Insufficient liquid cash funds → unable to meet short term debts

• Limited cash = missed opportunities

• Is the cashflow problem short or long term

How would you improve cashflow?

Increase volume of inflows 

Speed up timings of inflows - debtor payments. capital, cash sales

Reduce volume of outflows

Slow down timings of outflows - loan repayment, running costs, interest

What are the negatives of bad cashflow?

• Damage reputation

• Potential loss of customers if payment terms affect competitiveness

• Admin costs and time

• Need to offer discounts

• May affect profitability (bad debt / more expensive to lease long term)

What is debt factoring?

Selling a business’ debts

• Factoring house immediately pays a majority of debt

• Reduced risk of bad debt (non-repayment)

• They keep a percentage

• May alter customers image of business - upset bc they have debt collectors

What is ‘what if’ analysis?

Systematically changing variables to calculate a range of possible financial outcomes.

• Used for best / worst case senarios

• Changing: costs, prices, economic (interest/taxes)

What is variance and variance analysis?

The difference between the budget and the actual.

Analysis - Calculating and interpretting the variences

Adverse: Bad e.g. higher expenditure / lower income or profit

Favourable: Good e.g. more profit, lower expenditure

Variance analysis mark scheme

1. Identify cause of variance

2. What’s the Effect

3. Look for solution (if appropriate)

What are the causes of variance?

Competitor behaviour (lower prices / shut down)

Suppliers behaviour (change prices)

Economy (Interest / increase min wage)

Internal inefficiency (Poor management of budget / demotivated sale staff)

Internal decision making (Change suppliers)

What decisions need to be made after analysing variance?

1. Change / reallocate budgets

2. Staff training / rewards

3. Change suppliers

4. New marketing tactics

5. Review product portfolio

What are the uses of break-even?

• Min sales target

• Margin of safety

• Income and expenditure budgets

• Target: to achieve profit by a set point in the future

• Calculate profit/loss at different levels of output

• Assess impact of changing variables

• Aids decision making

What are the limitations of break-even?

• Assumes costs will stay the same

• Variables can change - F/V costs, new competition, interest rates, rent

• Assumes all products made are sold

• Prediction

What is contribution analysis?

Investigating effects of changes in variable costs and selling price on break-even level of output.

Helps decide: is business idea / product / branch feasible / New prices

What are special orders?

• SPecial / non-standard orders which don’t match normal provision

• One off orders or requests

• At a lower price

Considerations of special orders

1. Capacity

2. Cost implications

3. Ability to fulfil order - have enough resources? impact normal operations?

4. Impact on established customers (want lower prices?)

5. Profit worth it?

6. Brand reputation

7. Contribution - are fixed costs covered? Is price more the VC?

How can a business improve profits?

• Sell same amount, higher price

• Sell more at same price

• Sell same at same price, but reduce costs

What is a statement of financial position?

Formal document summarising the net worth of a business at a given point. Balances net assets with total equity. Measure of solvency

What does inventories mean?

The value of stock held

What is total equity?

Value of the shareholders funds

What is working capital?

• Measure of liquidity / ability to meet day to day expenses

• Current assets - current liabilities.