Business Studies As (2)

Finance section. Chapters 16-18 

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Using budgets

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. 

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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 
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Variance analysis

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 

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Improving Cash-Flow

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)
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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 

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Improving cash-flow

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 
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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
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this is great thank you x

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