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An agreed plan
establishing, in numerical
financial terms, the policy
to be pursued and
the anticipated outcomes of that policy.

Benefits of Budgets:

Provide direction and coordination
Motivate staff
Improve efficiency
Assess forecasting ability

Drawbacks of Budgets:

Difficult to monitor fairly ­ senior managers are less aware…

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process by
which the
outcomes of
budgets are
examined and then compared with the budgeted
figures. The reason for any variances are then found.

Calculating Variances

Variance = Budgeted ­ Actual figure

Favourable variances are when actual revenue is greater than budgeted
revenue, and when actual costs are below…

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Losses or low profits ­ if a business has lower sales revenue than
expenditure they may suffer cash problems

Ways of Improving Cash Flow:

Bank Overdraft

Advantages Disadvantages
Easy to arrange Variable interest payments
Flexible (Interest rises and falls with
Interest is only paid on the Bank of England's base…

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Companies overall profitability is in receiving a low value for the
increased asset
Could affect the ability to make
a profit

Sale and Leaseback

Advantages Disadvantages
Cash inflow is immediate Rent is wasted money
increases flexibility as more Reduces the amount of assets
machinery can be leased which the company…

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Profitability is the ability of a business to generate a profit or the efficiency
of a business in generating profit.
Measuring Profitability

Net Profit Margin (%) = Net profit* before tax

Sales (turnover)

*Net Profit = total expenditure ­ total revenue

Return on Capital is the
ratio showing net…

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Even profitable companies can face cash flow problems if they don't plan
carefully. A firm may purchase assets with its profit but not have enough
cash to pay employees wages and even though they could make a profit
every month or year (have have cash from creditors to come which…


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