Business Studies OCR F294

Consistency - works on the basis that all accounts will be produced in the same way. By having this in place, anyone looking at the accounts can be confident that the info within the accounts is accurate.

Going Concern -  Assumes that the company is operating as normal and intends to continue to operate as normal in the foreseeable future, and that there is no intention to liquidate the business.

Matching/Accruals - Costs of earning an income should be matched with that income. So, basically, the dates used on the final accounts are the ones where the transaction occured NOT when the payment is actually made. the match is between the date of transaction, not when payment is made.

Materiality - Calculating the value of the business need to be realistic, but not to the extent of counting every single asset when it may have little or no real value to the company. For Example, a company like BP would not count each paper cup because it has no real material value to the company, however a paper cup manufacturer would as the value would be important.

Objectivity - Accounts need to be drawn up on the basis of Objectivity, basically, without being influenced by personal opinions or bias.

Prudence/Conservatism - can compensate for the over-optimism of directors and managers within business. Similar to Objectivity, in terms of not overstating/inflating actual values to make financial sistuation appear more attractive. Its better to go with the worstcase scenario and then if things go better then its a bonus. So, overstate losses and understate Profits. (Pessimistic View)

Realisation - similar to Matching. Takes place when legal ownership changes hands, not when payment is made.

Overdraft

• firms bank account is permitted to go up to an agreed deficit limit.
• It is a 'Safety Net' and can help overcome/cover cash flow problems. 
• Interest is only paid on the amount overdrawn and the amount of time overdrawn. 
  • good because its flexible and easy to obtain.
  • interest is generally 2-4% above base rate and repayable on demand, without warning.

Trade Credit

• Purchasing Stock on credit... 'buy now, pay later'
• time allowed will vary depending on suppliers (14-70 days)
  • interest free; allows company to use materials and get income before paying, therefore preventing cashflow problems.
  • Failing to pay on time can cause problems with supplier relationships and gain a poor reputation.

Asset Sale

• Selling fixed assets for CASH
• Selling idle assets
• Crisis Sale: selling needed assets can jeopardise future of business.
• SALE AND LEASEBACK
  • allows use of asset but raises finance
  • asset does not appear on balance sheet

Hire Purchase

• buying an asset by installment payments.
• do not own until final payment
  • no large initial payment but will eventually be on balance sheet
  • final total cost is more that if purchased up front, may be out of date by final payment.

Debt Factoring

• selling debts to raise finance. Sold to debt factoring comapanies who collect debt on behalf of them. 
• They often charge a fee of a certain percentage, so will pay the comapny the agreed percentage before they have collected the debt and then once collected they keep what they collect.
  • ensures some payment is recieved. Reduces bad debts. reduces need for overdraft. No need to chase payments.
  • full amount not recieved, meaning you may make a loss.

Retained Profit

• using profit and reinvesting it.
• less dividends will be given out.
  • no interest on raised finance.
  • shareholders may be unhappy with less dividends, especially if the reinvestment doesnt bring a good return. If relied on, expansion will be slow.

Leasing

• gaining use of assets but do not own
• payment in instalments
  • avoids large lumpsum payment. Often includes maintanence and upgrading.
  • does not appear on balance sheet, so cannot be used as collateral against a loan. More expensive in long run.

Loan (medium/long term)

• agreed amount credited to bank account. 
• repaid in instalments over an agreed period of time.
  • makes financial planning easier. Can be fixed interest rate OR variable.
  • Collateral needs to be provided. Higher interest for smaller businesses as they are more of a risk.

Mortgage

• to purchase property

Selling Shares

• also known as equity finance.
  • Private Limited Companies cannot float share on stock market.
  • Dilutes ownership

Venture Capitalist

• finance from individuals or firms who lend money to or buy shares in a company (small or medium in size) that need finance to start up or expand.
  • expect high equity stakes as a return for the risk they take

Business Angels

• Similar to Venture Capitalist.
• Usually offer management advise, can bring contacts (suppliers, customers)
  • use needs to be carefully evaluated.
  • Angel will require a financial return and may insist on becoming actively involved in the running of the business. This could cause conflict.

Debentures

• only available to PUBLIC LIMITED COMPANIES,
• special type of long term loan
• not from bank
• need to be secured against asset
• investors can sell loan to other firm if they need capital back.

A BUDGET is a target for cost or revenue, that a firm/department must aim to reach over a given period of time. Costs are better below budget. Revenue is better over budget.

what is budgeting for?

• to ensure no department spends more than the firm expects. Therefore preventing unpleasant surprises.
• provides a way to measure a managers/departments success or failure.
• enables spending power to be delegated to lower levels, and local managers who are in a better position to know how much they need to spend.
  • Speeds up decision making process and motivates local budget holders

ways of Setting Budgets

• using last years figures
• zero budgeting

Zero Budgeting

• each departments budget is set at zero and requires the budget holders justify every pound they ask for when setting their budget.
• This helps stop the common problem of budgets creeping up little by little each year.
  • identifies departments where a large budget is no longer needed and enables funding of expansion elsewhere in the organization.
  • can effectively cut the entire cost base of a business. (useful in recession)
  • takes up alot of management time, that could be used more effectively elsewhere.
  • doesn't overcome the problem of devious managers who will always try to get a larger budget than they really need.

Best Criteria for setting budgets

• be clear on firms objectives and strategy for achieving them.
• departments with a key role in achieving objectives may expect and increase in their years budgets and those where no extra activity is required may have their budgets frozen or even cut a little to release funds for key role players.
• involving as many people as possible to keep commitment high in reaching targets.
• make the process as clear as possible so everyone knows how decisions are reached.

Pros and Cons of Budgeting

• way to control and monitor costs, so only those who are over budget need to be regularly checked by senior managers.
• vital tool in co-ordinating diverse activities. Every department's budget spreadsheet can be linked with company's' master budget.
• can see what's going well, what's not going so well and who is responsible,
• motivates budget holders, giving them a feeling of trust and value.
• succeeding gives a sense of achievement to motivate whole workforce.
• based on assumptions and predictions so not 100% accurate. Incorrect budgets can be demotivating if trying to achieve the impossible.
• powerful managers can convince boss to give higher budget than needed. for example, those with power in the boardroom. causing other departments to suffer and therefore deteriorate.
• may encourage short term decisions that damage future customer goodwill. more likely if managers are offered large bonuses for meeting or beating budgets.

Other types of budgets...

Flexible Budgets

• adjusts budgeted figures in line with the actual sales volume achieved. This makes sure that variances show changes in costs rather than a mixture of costs and sales volume. 
• so for example, if a company had budgeted costs of £120,000 and actual costs came in at £132,000. the rise would be acceptable and understandable if there had also been an unexpected rise in demand by 10%(£12,000 extra costs; more labour or materials) With flexible budgeting, if the company had 10% rise in sales, then the flexed budget would adjust budgeted figure by +10% and therefore show £0 variance.

Budget Variances

a variance is the amount by which the actual result differs from the budgeted figure. the terms used to describe a variance are...

Favourable - when the variance between budgeted and actual figures results in higher profits

Adverse - when the variance between budgeted and actual figures results in lower profit or a loss.

Variance Analysis - is a means of identifying symptoms and making a diagnosis as to the nature of a problem, then suggest the most appropriate cure.

Costing  - the act of measuring the effects of any business activity in financial terms. By costing a particular activity, the firm can work out whether it is likely to be profitable and worthwhile or not worth going ahead with. It can also help to plan for future and help find ways of reducing costs and maximising efficiency.

STANDARD COSTING

the cost that the business would normally expect for a particular product or completion of particular activity.