Business Unit 2 Finance

Business AS Unit 2 Finance

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Budgets

Definition of Budget

  • a plan for the future, detailing expenditure and income; from this you can calculate profit

Benefits of Using Budgets

  • increases control over finance
  • reduces chances of over spending

Drawbacks of Using Budgets

  • unexpected changes may undermine budgets eg external factors like increases in costs of materials
  • reduces the amount of flexibility of finances
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Variable and Adverse Variances

Definition of a Variance

  • the difference between budgeting and actual figures

Favourable Variances

  • where the income is higher than expected or the costs are lower than planned

Adverse Variances

  • where the income is lower than expected or the costs are higher than planned

Variance Analysis to Inform Decision Making

  • if costs are higher than expected then business should focus on lowering costs
  • if income is lower than expected then they should look at ways to increase it
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Cash Flow

Definition of Cash Flow

  • inflows and outflows of cash over a period of time

Causes of Cash Flow Problems

  • may be holding high levels of stock
  • delayed payments from customers
  • may have unexpected payments
  • insufficient sales
  • suppliers may expect payments straight away

Methods of Improving Cash Flow

  • negotiate with suppliers to pay later (extend trade credit)
  • decrease time allowed for customers to pay
  • 'just in time' - holding lower levels of stock
  • overdraft
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Profit

Net Profit Margin

  • the % of the company's sales revenue that is profit
  • net profit margin = net profit x 100
  • sales revenue

Return on Capital

  • the % of the money invested that is converted into profit
  • return on capital = net profit x 100
  • capital invested

Methods of Improving Profit

  • decrease costs eg. change supplier
  • increase sales revenue eg. increase promotion
  • increase price to increase revenue, however this could lead to decrease in sales
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