U5: Sources of Finance + Setting Budgets Flashcards
(24 cards)
What are the Personal/Internal Sources of Finance?
Personal Savings
Mortgages & Re-mortgages (on private property already owned)
Borrowing privately from friends and family
Retained profits
Sale and leaseback / Selling assets (e.g. cars)
What are the External Sources of Finance?
Bank Overdraft
Debt Factoring
Bank Loans
Venture Capital
Share Capital
Crowd Funding
Why and when is finance
needed?
• Starting Up
• Growing
• Other Business Situations (unusually large order, bad debt)
What are Budgets?
financial targets to be achieved in a
set period of time
What are the Importance of Budgets?
• The process by which financial control is exercised in a business
• Budgets tor revenues and costs are prepared in advance and then compared with actual performance to establish any variances
• Managers are responsible for controllable costs within their budgets
• Managers take remedial action if the adverse variances are regarded as excessive
How to construct a budget?
- First, work out the income budget (work out how much money the business will take from customers)
- then, work out the expenditure budget (decide how the money will be spent: on buying stocks, marketing, employing staff, etc.)
- then, work out the profit budget (combine the figures from the 2 other budgets)
What are the possible benefits to First Steps?
• Ensure don’t overspend
• Managers given individual budgets to manage - motivating
• Assign responsibility to budget holder
• Gain financial support from backers for 2/3 into investment into purpose built facilities
• Establish priorities
• More detailed the better
What will a new start-up find difficult and may have to rely on?
• A ‘guesstimate’ of likely sales in the early months of the start-up
• The entrepreneur’s expertise and experience, which will be better if the entrepreneur has worked in the industry before.
• The entrepreneur’s instinct, based on market understanding
• A significant level of market research
• Competitive spending
• What the business can afford
• Zero budget - work from the bottom up
What are the approaches to Historical Budgeting?
- Use last year’s figures as the basis for the budget
- Realistic in that it is based on actual results
- However, circumstances may have changed (e.g. new products, lost customers, credit crunch)
- Does not encourage efficiency
What are the approaches to Zero Budgeting?
- Budgeted costs & revenues are set to zero
- Budget is based on new proposals for sales and costs - i.e. built from the bottom-up
- Makes budgeting more complicated and time-consuming, but potentially more realistic
What do management use budgets to?
• Establish priorities & set targets
• Turn objectives into practical reality
• Provide direction and co-ordination
• Assign responsibilities
• Allocate resources
• Communicate targets
• Delegate without loss of control
• Motivate staff
• Improve efficiency
• Forecast outcomes
• Monitor performance
• Control income and expenditure
What are the Importance of Budgets?
- To ensure that no department or individual spends more than the company expects, thereby preventing unpleasant surprises.
- To allow a manager’s success or failure to be measured and perhaps rewarded. E.g. a store manager may have to meet a monthly sales budget of £25,000 at a maximum operating cost of £18,000. As long as the budget holder believes this target is possible, the attempt to achieve it will be motivating. Bonuses can be linked to achieving targets.
- To allow spending power to be delegated to local managers who are in a better position to know how best to use the firm’s money. This should improve and speed up the decision-making process and help motivate the local budget holders. This needs clear targets, clear budgets and the power to decide how to achieve them.
- Budgeting can motivate staff in a department. If budget figures are used as a clear basis for assessing performance it becomes clear to staff what they must achieve in order to be considered successful.
What are analysed budgets?
A budget is only useful if it is compared with actual results of the business AND if differences are investigated.
• Why are revenues lower than expected?
• Why are costs higher than expected?
• Why did the business not achieve the profits that they had hoped for?
What is a Variance Analysis?
The process which involved monitoring and comparing the performance of the business against the budget and looking at areas of differences or variances
How do you Calculate Variance?
Variance = budgeted figure - actual figure
What is a Favourable Variance?
Sales are higher than budgeted
Costs are lower than budgeted
What is a Adverse Variance?
Sales are lower than budgeted
Costs are higher than budgeted
What is an Adverse Sales Revenue?
Adverse sales revenue - sales revenue less than planned
Adverse Sales Revenue
Improve company image - PR donations to charities
Cut prices - if consumer demand is sensitive to price changes (price elastic)
Seek new markets - at home or overseas
Product range - update or extend as appropriate
Increase advertising and/ or promotion
Reduce waste - use fewer raw materials and produce fewer faulty products
What is Adverse Production Cost Variances?
Adverse production cost variances - expenditure higher than planned
Adverse Production Cost Variances
Cut wages or increase labour productivity - increase amount produced per worker per hour
Seek cheaper raw materials - purchase from overseas or in bulk
Reduce waste - use fewer materials and produce fewer faulty goods
Possible causes of Favourable
Variances
• Lower interest rates lead to a higher than expected increase in sales
• Bad publicity for a competitor’s products boosts sales above target levels
• Unions agree to a wage settlement below the rate of inflation that was budgeted for
• Higher £ exchange rate makes imported components cheaper than forecast
Possible causes of Adverse Variances
• Competitors offer special price deals that lead to lower sales for the business
• Staff efficiency falls and this leads to higher wage costs for each unit produced or sold.
• Oil/ gas price increase which raises energy costs
• Rent increases forced through by property owner are higher than expected
What are Disadvantages of Budgets?
• Are only as good as the data being used
• Can lead to inflexibility in decision-making
• Need to be changed as circumstances change
• Take time to complete and manage
• Can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget
