BUSS2 finance detailed notes

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Veer Thakkar
Business Revision Notes Unit 2
Using budgets
Definition: - A budget is a target for costs or revenue that a firm or department must
aim to reach over a given period of time.
There are two reasons that budgets are used when managing a business
1. As a means of delegating spending power
2. As a method of monitoring business performance.
Budgets as a method of monitoring business performance
Budget holders will try to exceed revenue budgets or stay under cost targets. It is
the process of comparison that allows budgets to be used as a method of
monitoring business performance.
Budgetary Variances
Definition: Variance is the amount by which the actual result differs from the
budgeted figure.
It is usually measured each month, by comparing the actual outcome to the
budgeted one.
Variances are referred to as adverse or favourable.
Definition Adverse variance - A difference between budget and actual figures that is
damaging to the firms profit eg costs up or revenue down.
Definition Favourable variance- A difference between budgeted and actual figures
that boosts a firms profits (E.g. revenue up or costs down)
Example Shown below ­
Variable Budget Actual Variance
Sales of X 150 160 10 Favourable
Sales of Y 150 145 5 Adverse
Material Costs 100 90 10 Favourable
Labour Costs 100 105 5 Adverse
Management by exception
In large companies white many separate cost centres they will have loads of budgets
to do with and they may be information overload. Most budgeting systems work on
the basis of management by exception. Senior managers will only be concerned with
department budgets which show large variances (probably adverse). In large
companies management authority is delegated down through the organisation.
Using budgets on Evaluation

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Budgets are a management tool. The way in which that they are used can tell you
a lot about a firm's culture. What ever the culture he/she must be given influence
over setting it and control over reaching it.
Even though budgets are set for future, analysis of actual against budgeted
performance can only take place after the event. This is true of all financial
monitoring and leads to doubts as to its effectiveness as a planning tool.…read more

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Getting goods to the market in the shortest possible time- The sooner goods
reach the customer the sooner payment is received. Production and distribution
should be as efficient as possible
Getting paid as soon as possible ­ The ideal arrangement is to get paid cash on
delivery. But most business work on credit. Even worse it's interest free credit,
so the customer has little incentive to pay up quickly. Early payment should be
encouraged by offering incentives such as discounts for early payments.…read more

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cash flow will often uncover problems else where in the business. Managing cash
flow is an integrated activity involving each part of the company.
Efficient production keeps costs to a minimum and turns raw inputs into finished
goods in the shortest possible time. Effective management of stock can have
considerable impact on cash needs. Effecting marketing ensures that the goods are
sold and that demand is correctly estimated, this avoids wasted production.…read more

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A typical net profit margin is an industry that will vary from one sector to another.
However, provided you sell a high volume of items your overall net profits can still be
high. IE ­ you may make relatively little profit per can of beans, but provided you sell
a lot your overall profits may still be high.
The return on capital
To measure the net profit in relation to the amount invested in a project. The
money invested is often called capital.…read more

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To increase net profits in relation to sales a business could do the following ­
Increase its price: - This would boost the profit per sale, but the danger is that
sales overall may fall so much that overall profits are reduced. The impact of any
price increase will depend on the price elasticity of demand.…read more

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= £3500 in total. Note that the cash inflow for the day = £450 hence revenue is
not the same as cash in.
Whereas revenue comes from just one source (customers), cash inflows comes
from many sources it is not just limited to trading. Selling an old warehouse for
£600,000 does not generate revenue, but it does bring in cash. Similarly taking out a
bank loan could not be classed as revenue, but it does put cash into your bank
current account.…read more

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balance, and may show the need for extra overdraft facilities to be negotiated. Or if
the firm's cash position is already weak, it may be safer to postpone the proposal.
Yet cash flow is no substitute for calculating profit. A cash rich business may
inevitably lead to insolvency (inability to pay the bills forcing closure) if the business is
not profitable. Getting cash inflows at the start seems great, but turn into a
nightmare if the cash outflows start coming in.…read more


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