Introducing financial planning

Financial management - The process of producing and interpreting accounts that record a business's expected or actual costs, revenues and profits. This helps managers to take good decisions.

Costs - The expenses paid by a business, such as its employees' wages.

Revenue - The income recieved by a business from selling goods and services.

Budget - A financial plan for the future operations of the business. Budgets are used to set targets to monitor performance and control operations.

Business plan - A detailed statement setting out the proposals for a new business or describing the ways in which an existing business will be developed.

Cash flow - A measure of the amount of money moving into and out of a business over some time period.

Sole trader - A business owned and operated by a single person.

Partnership - A group of between 2 - 20 people who contribute capital and expertise to an enterprise.

Company - Any incorporated business.

Shareholders - The owners of a company.

Limited liability - Provides protection for the owners of a company (normally the shareholders). They only risk the amount they have invested in the business in the event of its failure.

Internal source of finance - One that exists within the business.

External source of finance - An injection of capital into a business from individuals, other businesses or financial institutions.

Share - A document representing part ownership of a company.

Assets - Anything owned by a business from which it can benefit. Assets include land, vehicles, stocks and brand names.

Trade credit - A period of grace offered by suppliers before payment for goods and services is due.

Collateral - The security offered to back up a request for a loan. Usually this is in the form of property, as this is unlikely to lose value.

Business plan - A detailed statement setting out the proposals for a new business or describing the ways in which an existing business will be developed.

Marketing - The management process that identifies, anticipates and supplies customer requirements efficiently and profitably.

Business objective - The targets or goals of the entire organisation.

Profit - Measures the amount by which revenues recieved from selling a product exceed the total costs involved in supplying it over some time period.

Cash flow - A measure of the amount of money moving into and out of a business over some time period.

Human resources - The people who work within an organisation, including office staff, operational and shop floor employees, and managers.

Physical resources - An organisation's fixed assets such as premises and vehicles, as well as tangible items such as stocks or raw materials, components and finished goods.

Financial resources - A business's cash and capital resources. An assessment of a business's financial resources involves examining profits and profitability as well as cash flows, working capital requirements and company financing (that is, loans, share capital and reserves).

Allocative efficiency - The process of distributing resources effectively so that the minimum number of resources are in the right place at the right time.

Fixed costs - Costs that do not vary with the level of output. Fixed costs exists even if a business is not producing any goods or services.

Variable costs - They vary directly with outputy. They include labour, fuel and raw materials.

Total cost - The sum of fixed and variable costs.

Semi-variable costs - Expenses incurred by a business that have fixed and variable elements.

Revenue - The income a business earns from selling its goods and services.

Profit - This arises when a firm's revenue is greater than its total costs. A loss occurs when revenue is less than a firm's total costs.

Revenue - The income a business earns from selling its goods and services.

Fixed costs - Costs that do not vary with the level of output. Fixed costs exist even if a business is not producing any goods or services.

Variable costs - They vary directly with output. They include labour, fuel and raw materials.

Breakeven - The point at which a business sells exacly the right number of products so that its revenue equals its costs. In other words, at breakeven the business makes no profit but also incurs no loss.

Margin of safety - The amount current output exceeds the amount necessary to break even.

Cash flow - The money that enters and leaves a business as it makes and recieves payments.

Cash flow forecasts - Detailed estimates of when and how cash is expected to flow into and out of a business.

Cash inflows - Money recieved by a business from sales, investments or loans.

Cash outflows - Money that leaves a business through paying for wages, materials, marketing, fixed assets, etc.

Trade credit - An arrangement in which suppliers allow customers a period of time (usually on or two months) to pay their bills.

Overtrading - This occurs when a firm expands too rapidly without having the cash resources in place to adequately finance the expansion and meet its day-to-day commitments as well.

Working capital - The excess of current assets over current liabilities.

Budget - A financial plan for the future operations of the business. Budgets are used to set targets to monitor performance and conrol operations.

Variable analysis - One of the methods used to monitor company performance. It is the comparison of what actually happened with what the business budgeted (planned to happen).

Adverse variance - This occurs when the business's actual results are worse than those anticipated and planned for in the budget.

Favourable variance - This occurs when the actual results are better than those anticipated and planned for in the budget.