unit 5 - financial objectives

• Budgets


  • A plan for the future
  • A way of controlling income and expenditure
  • A way of monitoring performance
  • A way of making decisions
  • A way of planning for the future
  • A way of coordinating activities
• difficulties in constructing budgets:

  • difficult to forecast sales accurately
  • unexpected changes can increase the risk, increasing the costs
  • decisions by governments and other public bodies
• types of budgets

  • revenue
  • expenditure
  • profit
• budgets - financial plans for a future period of time usually one month or one year
• advantages of budgets:

  • allow managers to manage financial resources to maximise performance
  • set targets for employees
  • motivate employees
• disadvantages of budgets:

  • additional training costs
  • allocating budgets is difficult
  • long term planning isn't taken into account
• variance analysis - the process of investigating any differences between forecast data and actual data
• investment - purchase of assets such as property, vehicles and machinery
• non current assets - items that a business owns and which it sects to retain for one year or longer
• cash flow - movement of cash into and out of a business over a period of time
• cash flow forecasts- state the inflows and outflows of cash over some time period
• why are cash flow forecasts generated:

  • support applications for loans
  • avoid unexpected cash flow difficulties
• contribution - the difference between revenue and variable costs
• contribution = revenue - variable costs
• total contribution = contribution per unit x no. of units sold
• breakeven output - the output at which total costs and revenues are equal
• margin of safety - measures the amount by which a business current level of output exceeds break even output
• advantages of break even analysis:

  • simple technique
  • completed quickly
  • supporting information for bank loans
• disadvantages of break even analysis:

  • simplification of real world
  • only as accurate as data presented
• profitability - a meausre of financial performance that compares a business profits to some other factors such as revenue
• profit margin - s ratio that expresses a business profit as a percentage of its revenue over some trading period
• gross profit margin = gross profit / sales x 100%
• net profit margin = net profit / sales x 100%
• profit for the year margin = profit / sales revenue x 100
• Overdraft


  Exists when a business is allowed to spend more than it holds in its current account up to an agreed limit
• Share Capital


  Finance invested into a company as a result of the sale of shares in the business
• Bank Loan


  An amount of money provided to a business for a stated purpose in return for payment in the form of interest charges
• Long-term Finance


  Sources of finance that are needed over a longer period of time, usually more than 1 year
• Venture Capital

  Funds advanced to business thought to be relatively high risk in the form of share and loan capital
• Internal Sources of Finance

  A source that exists within the business
• Short-term Finance

  Finance needed for a limited period of time, normally less than one year
• External Sources of Finance

  An injection of funds into the business from individuals, other businesses or financial institutions
• Mortgages are long-term loans, repaid over extended periods of time used to purchase property
• Crowdfunding


  A practice of funding a project or venture by raising many small amounts of money from a large number of individuals (usually via the internet)
• Businesses using crowdfunding as a source of finance often use websites to communicate with those people who want to invest funds into the enterprise
• Debentures are loans with fixed interest rates that are long-term and may not even have a repayment date
• Opportunity cost


  The next best alternative that is foregone
• Websites allow businesses to connect with a large number of people and provide a means whereby investors can make payments to the business
• Among the best-known crowdfunding service providers are the peer-to-peer lenders (for example, easyMoney) who bring together businesses needing funds and people willing to lend relatively small amounts, in return for a fee
• Source of finance: Debt factoring

  Advantages: It allows business to receive cash almost immediately a sale is made, It may reduce a business’s need for an overdraft and interest charges