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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…

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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…

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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…

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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…

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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…

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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…

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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…

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Repaying Bank loans
Tax bill received but
not yet paid x
Buying freehold
property x
Paying electricity bill

Cash rich firms can be unprofitable _

It is also possible for cash-rich business to be unprofitable. There break even point
may be low, and cash inflows may arrive…

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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…


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