Finance

• Budgeting

  Financial plans for the future over a given period of time
• Budgets


  Describe the expected revenue and costs
• Sales revenue budgets


  Planned revenue from selling products
• Expenditure budgets


  A business's planned expenditure on labour, raw materials and other items essential for production
• Purpose of a budget

  • Helps a business meet its financial objectives
  • To plan for the future
  • To motivate staff (bonuses)
  • To control business expenditure
• Variances


  Unplanned changes from the budgeted figure
• Favourable variances


  The difference between actual and budgeted figures results in the business enjoying higher profits than expected
• Favourable variances


  • Less expenditure than expected
  • Higher revenues than expected
• Adverse variances


  The difference between actual and budgeted figures results in the business profits being lower than planned
• Adverse variances


  • Higher expenditure than expected
  • Lower revenue than expected
• Reasons for changes in variances


  • Economy is in a recession
  • A competitor brought out a new product
  • Raw material costs may have fallen
  • New/cheaper suppliers may have been found
  • Employees may be better trained/motivated
• Sources of finance


  Ways a business can obtain money to fund its operations and investments
• Gross Profit


  revenue - cost of sales
• Net Profit


  Gross profit - expenses
• Gross Profit Margin


  gross profit / sales revenue x100
• Net Profit Margin


  net profit / sales revenue x100
• Cash flow formulas


  • Net cash flow = total inflows - total outflows
  • Closing balance = net cash flow + opening balance
  • Closing balance is next month's opening balance
• Net cash flow = total inflows - total outflows
• Closing balance = net cash flow + opening balance
• Closing balance is next month's opening balance