1
Q
what is a budget
A
a financial plan of action normally covering a special time period that will describe expected levels of expenditure and revenues of a business
2
Q
- what should budgets be?
- what will the overall budget be based on?
A
- objective driven, the expected revenues and expenditure of each department should be based on what the business wants to achieve
- the budgets of departments such as marketing, HR and purchasing
3
Q
what are the 6 stages of the budgeting process?
A
- establish aims and objectives (profit, market share?)
- set production marketing and financial budgets
- break budgets down further
- establish procedures for monitoring budgets
-variance from predicted budgets examined and reacted to
- take experience and knowledge gained from setting one periods budgets and apply to next budget
4
Q
explain the production budget
A
- examples include the cost of purchasing raw materials, labour costs, costs of production
- expenditure only budget
5
Q
explain the marketing budget
A
-revenues from sales are predicted
- costs come from operating businesses marketing strategy
6
Q
explain the financial budget?
A
- based on business’s cash flow forecast
- works out if income can cover expenditure or if funds need to be raised
7
Q
what are the 6 benefits of budgeting?
A
- improved management control of organisation ( managers know what they’re spending, where and why )
- improved financial control ( any variances from budgeted amounts can be examined and reacted to)
- allows managers to be aware of responsibilities ( managers are aware of what they should be achieving)
- ensures that limited resources are used effectively ( allocates resources to where they are most likely to help achieve firm objectives)
-motivates managers ( will commit to ensure budgets are met)
- can improve communication systems within organisation ( helps to establish formal methods of communication that can be used elsewhere)
8
Q
what are the 3 problems with budgeting
A
- those excluded from the budgeting process ( may not be commuted to budget and may feel demotivated )
- if budgets are inflexible, changes in the market or other conditions may not be met by appropriate changes in budget ( e.g. a competition starts a new marketing campaign and marketing budget doesn’t allow for response)
- An ineffective budget can only be based on good quality information ( many managers overstate budgetary needs to protect departments leading to lack of control and pool allocation of resources )
9
Q
what is zero budgeting?
A
involves managers starting with a clean sheet so they have to justify all expenditure made
10
Q
how does zero budgeting help? (5)
A
- improves control
- helps with allocation of resources
- limits tendency for budgets to increase annually with no real justification for increase
- reduces unnecessary costs
- motivates managers to look at alternative options
11
Q
- what is budgetary control?
- what is variance ?
- what can variances be?
A
- the base of budgetary control is variance analysis
- any unplanned change from the budgeted figure
- favourable or adverse
12
Q
- what is a favourable variance?
- what is an adverse variance?
A
- when expenditure is less than expected or revenues are higher than expected
- when expenditure is higher than expected, or revenues are lower than expected
13
Q
- what is a cash flow forecast ?
- what are the 3 parts of a cash flow forecast?
A
- predicts how much cash is or will be available in a business or how much cash will be needed to keep the business running
- revenue/income
- expenses/ outgoings
- balances
14
Q
- what is revenue?
- what are expenses?
- what are total expenses?
A
- income received by a business for goods sold or services provided
- all the money spent by a business within a time period
- total of all categories of expenditure for the time period
15
Q
- what are cash inflows
- give 3 examples
A
- money coming in to a business
- cash sales, debtor payments, loan
16
Q
- what are cash outflows
- give examples
A
- money going out of a business
- fixed costs, variable costs
17
Q
- what does it mean if cash
inflow is is greater than cash outflow?
A
- positive net cash flow
18
Q
- what does it mean if cash outflow is greater than cash inflow ?
A
negative net cash flow
19
Q
- what are the reasons for cash flow forecast problems? (3)
A
- -sales are not at expected level
- costs increase
- internal factors
20
Q
- give examples of why sales may not be at the expected level (4)
A
- increase/ decrease in competition
- customers spending habits change
- changes in fashions
- gov influence (tax, law)
21
Q
give examples of why costs may increase (4)
A
- price of raw materials increases
- high inflation
- high interest rates
- labour costs rising
22
Q
give examples of internal factors that may cause cash flow forecast problems
A
- poor initial predictions of income and expenditure
- late payments from debtors
- poor budgeting and lack of control spending
23
Q
what are solutions to predicted cash shortages? (4)
A
-increase revenue
- reduce costs
- delay payment
- extra funding
24
Q
give examples of increasing revenue to aid cash shortages
A
- marketing campaign
- higher prices
- redesign
25
give examples of reducing costs to aid cash shortages (2)
- reduce staff
- cheaper supply ( though this may have quality implications)
26
how may delaying payments aid cash shortages
what are the issues?
- owners could communicate with creditors and delay payments
- their could be delayed deliveries, interest on debt, and a cash in hand demand for later
27
1. give examples of extra funding to aid cash shortages
2. what are the problems?
1. - business loan, owners capital
2. - poor cash flow can make it difficult to get a loan
- outside investors take a while and want shares in the business
- over draft is only possible if the business has a good account management history
28
what are the benefits of a cash flow forecast? (4)
- accurate one allows a clear idea of how the business is performing now and in the future
- allows managers to specify when a business may need additional funding
- inconsistencies can be identified and removed
- businesses can plan ahead when large positive cash flow is predicted through investment and paying debts
29
what are the limitations of a cash flow forecast? (5)
- drawing one up takes up management time (could be more productively used elsewhere)
- the forecasts must be accurate to have value this can be especially difficult if the business has little to no trading history )
- longer the time scale the less accurate the cash flow forecast
- inflation can impact accuracy of figures
- needs to be monitored to have on going usefulness
30
what is a trading profit and loss account?
historic view of a business’s trade income and expenses over 12 months
31
what are the 3 parts of a trading profit and loss account?
-trading account
- profit and loss account
- appropriation account
32
what does the trading account show in a trading profit and loss account?
the same of a business and the gross profit made
33
what does the profit and loss account of a trading profit and loss account show?
net profit
34
what does the appropriation account show of a trading profit and loss account?
distribution of profit and loss
35
1. what does gross profit show?
2. what does net profit show?
1. an indicator of how efficient the business is at making and selling products
2. how efficient a business is overall as expenses and revenues are included
36
1.what is gross profit?
2.how do you work out gross profit?
1. profit a business makes after deducting the costs which are associated with making and selling the product/ service
2. sales revenue- costs of goods sold
37
what is the costs of goods sold?
direct costs of production such as materials and labour
38
how do you work out gross profit margin?
gross profit/ sales revenue X 100
39
what should be considered when evaluating gross profit margin?
- the industry of the business
- for example a jewellers may sell at 2-3 times more than they bought for but and fairs farm would have a low gpm
40
1. how can we interpret gross profit?
(5)
- yearly increases in gross profit and gpm is good for a business
- gross profit performance can be assessed against competitors
INVESTIGATION MAY CONCLUDE
- if costs of sales decreases but s.p. stayed the same the gross profit would decrease
- if the s.p decreased and the costs of goods sold stays the same gross profit would decrease
AFTER INVESTIGATION
- a business can try to increase g.p. by increasing prices of finding cheaper suppliers
41
what is it important to consider when assessing gpm
(4)
- type of business
- size of business
- quality of stock control
- external factors such as interest rates, type of industry and target market
42
how do we work out net profit?
sales revenue- total business expenses
43
1. what else can net profit be called?
2. what doesn’t net profit include?
1. bottom line
2. tax as business pays tax based on net profit figures
44
how do we calculate total business expenses
costs of sales + operating expenses + overheads
45
how do we calculate net profit margin?
(net profit/ sales revenue ) X 100
46
how can we interpret net profit
- higher the net profit margin the better off the business
- can compare net profit to competitors or against previous years performance
47
what should be done if net profit margin is lower than gross profit? (2)
- businesses need to reduce operating costs and overheads
- owners and managers should investigate costs such as rent, insurance and salaries to see if there’s an opportunity to reduce these costs
business unit 2
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