CIPS L4M2 Chapter 1 (1.4) Flashcards
What are financial budgets?
A plan in terms of money for a defined period showing revenues or cost, or both (usually twelve months)
What is the purpose of financial budgets?
To help the organisation know whether or not it will have the funds to meet its obligations
Example: reinvest into the business, pay suppliers, to improve the performance.
What is the meaning of profit, income and expenditure?
- Profit is the financial gain made in a transaction
- Income is money received
- Expenditure is the amount of money spent.
What are the three (3) main activities that are involved in budgeting and managing financial budgets?
- Planning
Preparation of a business case. •Senior Managemet will look for a financial plan that identifies how money will be spent, and on what and when •Budget •is prepared before the period begins and is valid for only the planned level of activity
- Controlling
Requirement to control spending. •Gathering and analysing data to show how money is spent against the budget. •Variance between budget and spend = a plan of action to bring back spend
- Decision Making
How to bring the spend back under control
Explain the activities of the plan-do-review cycle in Budgeting?
- Plan
Develop budget, based on the business case approved
- Do
Monitor variance and take action
- Review
Evaluate the Budget performance and re-plan
What is working Capital? and why Businesses cannot operate without it?
- Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, and its current liabilities.
current assests - cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods
current liabilities - accounts payable
- Business must have sufficient funds in the bank to pay what it owes before it receives funds from people who owe it.
What are the main steps in the Cash flow cycle?
- Receive raw materials and products
- Manufacture products
- Store in inventory
- Pay suppliers
- Sell products
- Receive funds from customers
What are the Cash-Out steps of the cash flow cycle?
- Raw Material
- Manufature
- Store
- Pay suppliers
What is the Cash-In steps of the cash flow cycle?
- Sell products
- Receive funds
What are the main categories of cost entries in a financial budget and their timing on a business?
- Revenue
incoming money • cash from the sale of product sold •accrual - an adjustment made to set of financial accounts to reflect activity that has occurred but for which cash has not yet been received or paid → value in the profit and loss account •Calculation of sales in a cash flow analysis - accounts receivable at the start of the year (amount owed by customers) + sales - cash received = accounts receivable at the end of the year
- Direct costs
costs of the items that are used to make the product or provide the service •Internal cost - wages •External cost - purchases from suppliers •Same consideration as for revenue •Accurals - purchases on credit and not being paid → value in the profit and loss account
- Overheads
costs not directly associated with the production process but necessary for providing and maintaining business operations (indirect costs) rent, electricity, etc.
- Depreciation
decrease or loss in value of an asset •asset’s value is ‘written down’ the value represents depreciation •depreciation value is used for the profit and loss account •Full cost is used for cash flow calculations as the purchase would of been made through the bank
- Bank loans
create cash flow at the time of draw-down, Investments •may or may not be purchase of credit • pay back a bank loan immediatley •leasing of an assest where there would be a charge to an accounting period
- Dividends
payments of cash from a corporation to its stockholders in return for investing in the company through shares •money may not leave the bank account within the financial period but when recipients cash their cash
What are the types of Budgeting?
- Incremental budgeting
Adding new funds (increment) to cover inflation onto the amount previously budgeted (in last year’s budget)
- Advantage→saves managment time.
- Disadvantage→stifles innovation
- Zero-based budgeting
A method of budgeting in which every expense must be justified starting from zero.
- Advantage →allows managment to uncover alternative and more innovative ways to become more efficient and effective.
- Disadvantage →time taken to create and review a zero-based budget.
What are the advantages to budgeting and budgetary control?
- It compels managment to set future detailed plans for achieving targets
- It promotes co-ordination and communication
- It requires managers to be responsible
- It can be used as a yardstick to measure actual performance and assessment
- It enables remedial action to be taken as variances emerge
- It can motivate employees - if they take part in setting the budget
- It economises managment time - utilising the managment by exception principle
What is budget variance? and explain the types of budget variances
- The difference between actual spending and budgeted amounts
Variance → Q1 P1 (previous cost) - Q2 P2 (present cost)
- Price and quantity variances
Quantity variance equation (Q1 - Q2)P1
Price variance equation (P1 - P2)Q2
- Labour variance
difference between the actual wage cost and the budgeted cost.
Wage rate variance - more overtime paid than expected or a different grade of worker used from the one planned
Labour efficiency variance - whether staff took more or less time than expected per unit.
- Overhead Variance
the difference between actual overhead cost and budgeted overhead costs
Volume Variance - overhead costs for services or the production of goods is greater or less than that budgeted
Expenditure Variance - overhead cost is greater or less than bugeted for the level of output produced
