Business Unit 2 Finance

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

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

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

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