Finance

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  • Created by: Chantelle
  • Created on: 22-05-13 21:46

Budgets

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
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Budgets

Benefits (continued)

  • identify & correct problems
  • motivate staff

Drawbacks

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

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

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Cash-flow

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

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Cash-flow

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
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Improving Cash-flow

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
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Improving Cash-flow

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
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Improving Cash-flow

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
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Improving Cash-flow

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
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Improving Cash-flow

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
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Measuring & Increasing Profit

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 (%)

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Capital

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 (%)

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Improving Profitability

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
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Comments

davidsalter

A useful set of revision cards which cover most aspects of finance - budgets, cash flow and profitability. Can be used for last minute revision.

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