Drawbacks of using Budgets
- Allocation may be inappropriate
- Allocations may be incorrect because circumstances have changed
- Keeping to a budget may not be effective
Benefits of using a budget
- They provide direction and coordination, ensuring that spending is geared toward the aim of the business
- Successful budgeting motivates staff, through recognition and a sense of achievement
- Budgets encourage accurate forecasting and thus help forward planning
How is favourable variance shown?
- Actual revenue is greater than budgeted revenue
- Actual costs is lower than budgeted costs
How is adverse(unfavourable) variances shown?
- Actual revenue is less than budgeted revenue
- Actual costs are above budgeted costs
What does variance show?
Variances shows the change in efficiency, where the business has made mistakes or improved its performance. It can also show that external influences, such as changes in the market, have made it more difficult or easier for a firm to meet its targets.
Name some causes of cash-flow problems
- Seasonal Demand: Low cash inflow on certain times of the year
- Overtrading: Firms buy lots of extra materials becoming short of cash
- Over-investment in fixed assets: Drains company of cash
- Credit Sales: Lack of cash till credit period is over
Name two ways of improving cash flow?
- Bank overdraft
- Short Term Loan
- Factoring
- Selling assets
- Sale and Leaseback
Benefits of bank overdraft
- It is easy to arrange and can be used to pay for whatever the business requires
- Interest is only paid on the level of the overdraft that is actually used
Benefits of short term loan
- Bank loans are usually at a fixed rate of interest, making budgeting easier
- The rate of interest charged is usually lower than the overdraft rate
Benefits of factoring
- Cash flow improves as customer payments go to the firm
- There are lower administration costs as the factoring company collects the debts
Benefits of Selling Assets
- Sale of fixed assets can provide a large sum of money
- It is possible that a particular asset is no longer helping towards the business’s overall success
Benefits of sale and leaseback
- It provides an immediate inflow of cash
- A firm can be more flexible as new and more efficient assets can be leased
- Firms may lease assets such as machinery and computer software so that the owners are responsible for servicing and solving any problems
How do we make sense of NPM and ROC calculations?
By using the two comparisons, comparison over time and comparison with alternative investment
Name two ways of improving profitability
- Increasing the price: If a business increases their price on a product or service it will widen their profit margin
- Decreasing Costs: If a firm can cut costs, they will increase their profit margin
- Increasing Sales Volume: Increasing the amount of products sold can increase profit margin
What is the difference between cash and profit?
Profit is calculated by subtracting expenditure from revenue. However, profitable firms can still experience a shortage in cash.
Give two reasons as to how a profitable business can be short of cash
- Paying dividends to shareholders will leave a firm short of cash
- Purchasing fixed assets will involve a large outflow of cash
- If the firm sales are on credit, it will be waiting to receive cash after the credit period
