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Unit 2 ­ Finance
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USING BUDGETS
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Budgets

A budget is an agreed plan establishing, in numerical or financial terms, the policy to be
pursued

Benefits

They provide direction and coordination
They can motivate staff
They improve efficiency
They encourage careful planning

Drawbacks

They are difficult to…

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A favourable variance would happen when:
- Actual income is greater than budgeted income
- Actual costs are below budgeted costs
An favourable variance will mean more profit than expected

Adverse Variance

When costs are higher than expected or revenue is lower than expected
An adverse variance would be shown…

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Interest is only paid on the level of the overdraft that is actually used
- Interest is only paid on a daily basis
Unlike with a bank load, a firm that uses a bank overdraft does not need to provide
security (collateral)
Bank overdrafts are based on flexible interest rates,…

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If a particular asset is no longer helping towards the business's overall success, sale of the
asset will not only ease the cash flow problem, but also enhance the overall profitability of
the business
Assets such as buildings and machinery may be very difficult to see quickly
- A business…

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Profit

The difference between the income of a business and its total costs
Profit = revenue ­ total costs

Profitability

The ability of a business to generate profit or the efficiency of a business in generating
profit

There are two ways of measuring profitability.

Net Profit Margin

Compares the profit…

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more profit
- This strategy will be particularly effective if the product is a necessity or has no close
substitutes, as customers will be willing to pay the higher price
- But.. This strategy will fail if the higher price leads to customers switching to rival
products or just giving…

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