Finance

agreed plan of action over a given period of time e.g 12 months

Income budgets - planned targets for revenue or other income for a business or department

Expenditure budgets - planned targets for spending or cost for a business or department in a given period of time

Benefits

• maximise revenue
• control spending and minimise cost
• resources are used in the most efficient way
• meet the set targets
• profit & return on investment
• manage cash flow
• minimise potential conflict & enhance teamwork
• delegation without the loss of control

Benefits (continued)

• identify & correct problems
• motivate staff

Drawbacks

• unrealistic targets
• resentment and conflict with management
• may de-motivate rather than motivate staff

the difference between the budgeted and actual figures

Favourable variance (F) - when actual figures are better than budgeted - actual cost less than budgeted cost

Adverse variance (A) - when actual figures are worse than budgeted - actual cost more than budgeted cost

Variance analysis - involves comparison and calculating differences between budgeted and actual figures and investigating possible reasons for any differences

Decision-making - involves making a choice between alternative courses of action

the movement of money into and out of a business, including receipts

Cash inflows - cash coming into the business (receipts), including sales made into cash

Cash outflows - cash going out of a business (payments), including purchases of raw material

Negative cash flow - where cash outflows exceed cash inflows

Debtors - individuals or other businesses to who owe the business money for good or services received

Creditors - individuals or other businesses to whom the business owes money

Stock (inventory) - raw materials and components

Causes

• Allocating too much stock
• Negotiating too little credit
• Poor credit control
• Holding excessive stock
• Lack of budgeting and forecasting
• Over investment in fixed assets
• Poor control of costs
• Failure to make profit
• Seasonal demand
• Negative changes in the external business environment

Overdraft - an arrangement between a business or individual and their bank to withdraw more money from their account than is deposited in it, up to an agreed limit

Advantages 

• simple and quick to arrange
• flexible and convenient
• cheap in the short-term
• no security required

Disadvantages

• Expensive if used regularly for large amounts - interest charged between 2% & 4% over banks base rate
• repayable on demand - can be recalled without notice

Short-term loan - a business is advanced a set figure and repays the amount over an agreed period of time i.e a year

Advantages

• simple and quick to arrange
• lower rate of interest than overdrafts
• not repayable on demand
• payments can be offset against task

Disadvantages

• regular interest payments
• less flexible and more expensive than overdraft
• security

Debt Factoring - sells debts to a business that specialises in collecting debts in return for a fee

Advantages

• reducing overdraft/ interest payments
• less administration costs in chasing late payments
• time freed up to spend on other activities

Disadvantages

• reduced revenue and profit margins
• negative customer perception/ reaction

Leasing - a business rents a fixed asset rather than purchasing it

Sale of assets - a business sells fixed assets, that they own and no longer use

Advantages

• no interest charges as with overdrafts, short-term loans
• greater capacity utilisation and profitability

Disadvantages

• loss of use of asset
• can be difficult to sell fixed assets quickly
• reduces collateral available to offer as security for a loan

Sale and lease back - a business sells fixed assets that they own and then leases them back, paying a monthly sum to the leasing company

Advantages

• cash generated while use of asset maintained
• leasing provides flexibility as business needs change
• a scope to update to latest technology often with little extra cost

Disadvantages

• committed to meeting regular loan payments
• in long-term will have effectively paid for the asset, yet will not own it
• reduces collateral available to offer as security for a loan

Profit - what is left from revenue after costs have been deducted

Gross profit - cost of sales (direct costs) - revenue (turnover)

Net profit (Profit before tax) - profit made after costs of sales, other expenses and interest have been deducted from revenue, but before tax

Profit margins - relationship between profit and revenue, provided indication of how effectively costs are being managed within a business

Net profit margin - net profit / revenue X 100 (%)

money invested in a business or specific business project - from owners and shareholders, from banks or other financial institutions (loan capital)

Return on capital - a ratio expressing the amount of money made on an investment as a percentage of money invested

return / capital invested X 100 (%)

relationship between profit and something else e.g revenue

Improving profits & profitability in terms of of net margins

• increase revenue without increasing costs
• reduce costs without reducing revenues

Improving proftability in terms of return on capital

• increase profit without increasing capital invested
• reduce capital invested without reducing profit