Unit 2 Finance

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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 monitor fairly
Allocations may be incorrect and unfair
Savings may be sought that are not in the interests of the firm
They may be inflexible
Encourages budgetary slack
A Good Budget Should:
Be consistent with the aims of the business
Be based on the opinions of as many people as possible
Set challenging but realistic targets
- Be SMART
Be monitored at regular intervals
Be flexible
Variance Analysis
Variance analysis is the process by which the outcomes of budgets are examined and then
compared to the budgeted figures
The reasons for any differences (variances) are then found
Formula
Variance = Budget figure ­ actual figure
Favourable Variance
When costs are lower than expected or revenue is higher than expected

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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 when:
- Actual income is less than budgeted income
- Actual costs are above budgeted costs
An adverse variance will mean less profit than expected
The type of variance will depend on whether it is…read more

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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, so it is difficult to budget accurately
- The bank may change its rate of interest
The rate of interest charged on an overdraft is usually higher than that charged on a short
term bank…read more

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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 trying to make a quick sale usually has to accept a much lower price than its
true value
It is fundamental principle of business that a firm should not sell fixed assets to improve
liquidity,…read more

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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.…read more

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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..…read more

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