3.5

• cash flow is the amount of available cash in a business
• gross profit

  revenue - cost from sales
• operating profit

  gross profit - overheads
• net profit

  operating profit - taxes, interest and one of expenses
• adverse variance is where the outcome is worse than expected whereas favourable variance is where the outcome is better than expected
• Revenue objectives

  Sales maximisation

  Specific increases

  Competition
• Cost objectives

  Specific reductions

  Replacing existing costs

  Improving efficiency
• Profit objectives

  Profit maximisation

  Specific increases

  Competition
• Cash flow objectives

  Minimise closing balance

  Balancing sales revenue

  Balancing costs

  Increase levels of cash at certain times
• Sources of finance

  Share issue

  Crowd funding

  Loans

  Grants

  Selling unwanted assets

  Debentures

  Trade credit

  Debt factoring

  Overdraft

  Credit card

  Hire purchase
• Crowd funding is giving funding for a business to kick-start and getting items in return. Crowd equity is the same but getting shares in return
• Types of budget

  Expenditure

  Income

  Profit
• Cash flow forecasting is important to plan in advance what to do if we have a lack or surplus in cash
• Increase cash inflows

  Sell shares

  Increase price

  Increase sales

  Introduce new products

  Product variations

  Market growth
• Decrease cash out flows

  Use economies of scale

  Make alterations

  Redundancies

  Cutting overtime

  Renegotiate finance

  Rationalise capacity
• Factors influencing investment decisions and objectives

  Expected return on investment

  Interest rates

  Expected demand

  Levels of technological change

  Availability of finance

  Business confidence

  Attitude to risk

  Level of spare capacity

  Nature of production

  Competitors actions
• Income budget shows the agreed and planned income of a business over a period of time. Should be linked closely to marketing targets. By considering sales of each item individually it is easier to to predict which products will grow rapidly or fall
• Expenditure budget shows the agreed and planned expenditure of a business over a period of time. Costs in an expenditure budget are raw materials, labour, marketing and rent.
• Profit budget shows the agreed and planned profit of a business over a period of time. Used to ensure that a business is planning financial actions. It is best to assess profit over a complete year but sure be constantly reviewed
• Value of budgeting

  Gain financial support

  Ensure we don't overspend

  To establish priorities

  To encourage delegation and responsibility to motivate staff

  To assign responsibility

  To improve efficiency
• Problems of setting budgets

  Manages may not know enough about a department

  Problems in gathering information

  Unforeseen changes

  Level of inflation is hard to predict

  Budgets may be wrong
• Short term finance is repayed within 12 months whereas long term finance is usually due after 3 years
• finance objectives

  revenue / costs

  credit management

  cash flow and liquidity

  capital structure

  investment levels

  return on investment

  debts
• cash flow objectives

  minimising closing balance

  reductions or increases in overdraft and new borrowing

  balancing costs and sales revenue

  increase levels of cash when needed

  increasing liquid non cash assets
• why is cash flow management important

  to forecast whether cash is likely to be short so we can plan how to deal with it. to help a business obtain finance. to forecast when surplus cash may be available so businesses can plan how to use it to benefit them
• variance analysis is having things turn out better or worse than expected

  better = favourable variance

  worse = adverse variance
• improving cash inflows 


  increase sales

  increase price

  sell more shares

  New products or new product variations

  growth into new markets

  crowdfunding

  selling unwanted assets
• how to decrease outflows

  benefit from economies of scale

  increase efficiency

  make product alterations ie cheaper raw materials

  redundancies

  rationalise capacity

  renegotiate finance
• we set financial objectives to improve our financial position and to monitor and manage it, to give a direction for employees on our situation and how it needs to improve, to ensure we have sufficient cash flow and capital to be profitable, and to ensure external factors are noticed before they can have an effect on us
• subsidies are an additional payment for the product you make ie. farmers getting extra money per each bag of potatoes they sell
• debentures are a loan with a fixed lifespan but with a fee added rather than interest, ie. paying a football stadium £20,000 and getting 2 free tickets to every England game, you receive the full £20,000 at the end. this is done so the stadium can use that money for their immediate costs but they have to pay it back eventually
• trade credit is the purchase of supplies without immediate payment. it is a source of short term finance
• debt factoring is selling account receivables to a third party at a discount, allowing companies to gain majority of revenue from sales immediately without having to wait because of the customers payment terms
• overdrafts and credit cards are prearranged loans
• leasing is paying for a product overtime and when payment is complete the product is returned to the business
• hire purchase is when customers pay a deposit then pay the price of the asset plus interest over a period of time
• share issue is beneficial as it is a quick source of finance and no interest is paid on it. the limitations are that it may not raise the amount if money needed.
• crowdfunding and crowdequity is good because it gains lots of money and is free to do. however there is a risk of failure and reputional risks
• the value of budgeting

  you can gain financial support

  to avoid overspending

  to establish our priorities

  to encourage delegation and responsibility to motivated staff

  to improve efficiency
• good budgeting is consistent with business aims, it is based on a broad range of opinions, it means setting challenging but achievable targets and montoring these at regular intervals and allowing for changes in business environment