What is a budget?
A financial document which outlines how much money you have to spend on certain items. It sets targets for spending and revenue over a period of time.
Why do businesses set a budget?
- Helps control its finances – balance revenue and spending.
- Helps to identify areas where savings could be made.
- Helps identify problems need solving
- Helps businesses to achieve what it wants through planning – where resources need to go.
What is Budgetary control?
Process of checking what is actually happening against the planned budget and taking action to correct problem where needed.
What is budgeting?
Setting a budget for completing a task.
Give 2 different types of budgets a business would have
- Marketing
- Recruitment
- Production
- Revenue
- Maintenance
What are the purposes of Budgeting?
- To set the amount of money (expenditure) to spend on that activity
- To make sure you have enough revenue to cover the expenditure
What is the purpose of Budgetary control?
To identify overspends and underspends so that appropriate action can be taken.
How is budgetary control use to help identify Overspends?
- Where too much has been spent on Labour, Raw materials, Utilities (gas and electricity)
- Problem as business needs to be able to cover these additional costs
- Could lead to not being able to pay bills – production could stop or staff could refuse to work.
- Could wipe out profit made from previous periods
- Could result in money being taken from one budget to cover the other.
How does Bugdetary control help when identifying Underspends?
- Not always a good thing to do – means you are not investing the money that is available to you.
- Its less of a problem than overspending – as money is still available.
- Could result in a shortage of resources (raw material, or staff)
- Could lead to less money being given in future budgets.
What is the formula for calculating Current Ratio?
Current ratio = Current assets/current liabilities
This ideally should be between 1.50 and 2.0
What is the formula for calculating Liquid Capital Ratio
Liquid Capital Ratio= Current assets – Stock /
Current liabilities
This should be over 1.0
What is the formula for calculating Gross Profit Margin?
Gross profit Margin = Gross profit/ Sales x100
This is shown as a % and shows how much Gross Profit is made from Sales – the higher the better. Remember Gross Profit is the “raw” profit before other expenses taken out
What is the formula for calculating Net Profit Margin?
Net Gross profit Margin = Net profit/ Sales x100
This is shown as a % and shows how much Net Profit is made from Sales – the higher the better. Remember Net Profit is the end profit after all other expenses have been taken out
