Benefits of using a budget:
- They provide direction and coordination. (budgets and geared towards the business aims)
- They motivate staff. (individuals are encouraged by responsibility)
- They improve efficiency. (by reviewing budgets they business can pin point failures and successes)
Draw backs of using a budget:
- They are difficult to monitor fairly. ( senior managers will be less aware of the detailed expenditure and costs, May rely on the honesty of the budget holder)
- Allocations may be incorrect.
- Savings may be sough that are not in the interests of the firm.
Features of good budgeting:
- Be consistent with the aims of the firm
- Be based on the opinions of as many people as possible
- set challenging but realistic budgets
- be flexible
Variance analysis: The process by which the outcomes of budgets are examined and then compared with the budgeted figures. the reasons for any differences are then found.
Favorable variance: when costs are lower than expected or revenue is higher then expected.
Adverse (unfavorable) variance: when costs are higher than expected or revenue is lower than expected
A variance budget is calculated by the following formula:
Variance = Budget figure - Actual figure
Causes of problems:
- Seasonal demand (the demand for some products or services are seasonal E.g Christmas trees)
- overtrading (as a result of becoming overconfident businesses may expand rapidly with out sufficient long-term funds)
- over-investment in fixed assets (firms may invest in fixed assets in order to grow, but leave themselves with inadequate cash for day-to-day payments )
- Poor stock management (organizations might hold excessive stock levels, tying up cash that could have been use for other purposes)
Ways of improving cash-flow
Bank overdraft: an agreement whereby the holder of a current account is allowed to overspend an agreed amount but has to be payed back immediately
+'s : Flexible, No security needed, Administrative convenience.
-'s : Variable interest payments, higher interest rate, immediate repayment
Short-term loan: a sum of money provided to a firm or individual for a specific, agreed purpose. Repayment of the loan will take place within 2 years and possibly much less.
+'s : fixed repayments, Lower interest rates
-'s : Higher interest payments, security
Factoring: when a factoring company (usually a bank) buys the right to collect a companies credit sales. +'s :
- Improved cash flow in the short term (this may save expenses such as overdraft interest charges )
- Lower admin costs
- reduced risk of bad deb -'s :
- Loss of revenue (the business using a factoring company loses between 5% and 10% of its revenue)
- High cost
- Consumer relationship problems
Sale of assets: when a business transfers ownership of an item that it owns to another business or individual, usually in return for cash.
- Income (it can raise a considerable sum of money, particularly in the case of large asset such as buildings)
- profitability (its possible that a particular asset is no longer contributing towards the business overall success, in this case the sale of an asset will provide funding towards cash-flow
- Receiving a low value for the assets (assets such as buildings and machinery may be difficult to sell quickly)
- reduced ability to make profit