Business Studies As (2)

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)

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. 

Benefits: 

• 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

Problems:

• Receiving a low value for the assets (assets such as buildings and machinery may be difficult to sell quickly)
• reduced ability to make profit