A budget is an agreed plan establishing in numerical or financial terms the policy to be persued and the possible outcome of that policy. There are 3 types of budget that is often used by businesses….
- Income budget: Is the planned income into the business over a period of time
- Expenditure Budget: is the planned expenditure by a business over a period of time
- Profit Budget: Is the planned minimum amount of profit made by a business over a period of time
There are benefits and draw-backs of using budgets, these include
Benefits of budgets
- to establish priorites and to indicate the level of importance attached to a particular policy or division
- to provide direction and coordination and ensure that the spending is geared towards the firms aims
- to assign responsibility by identifying the person who is resonsible for the success/failure
- To motivate employees by giving them targets to work towards so they would greater responsibility and recognition when they meet their targets
- to improve efficiency by investigating the reasons for failiure and success
- to encourage forward planning by studying possible outcomes
Drawbacks of using Budgets
- a budget that is set to generously may encourage inefficiency, this will demotivate staff and hinder progress through a lack of money
- external factors outside the budget holders control may affect their ability to stick to a plan
- poor communication can be a problem as it would mean that people would not understand each other or the area in question and also other factors that might influence the budgets
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Budgetary control is important to the business as it is the establishement of the budget and the continuous comparisons of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for revision of the objective or strategy. A Variance is the difference between th planned budget and the actual budget. If the variance is poor, such as higher fixed costs or lower sales, then it as an adverse variance. Whereas if the budget is good, such as higher sales and lower fixed costs, then it is known as a favourable variance. By identifying what type of variance it is, it can allow a business to identify responsibility and take appropriate action. If its an adverse variance, then providing the factor that caused the adverse variance is under the firms control- they can then consider taking alternative approaches. Favourable variances can be used to identify efficient methods that can be adopted elsewhere in the company.
Variances can be caused by changes in-
- storage and wastage of material
- quality of material
- cost of material
- morale and efficiency of staff
- effiiciency changes
- wages
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Improving Cash flow
Cash flow management means that there is careful control of cash in theshort term in order to ensure liquidity. A business that is making losses will fail. But even a business that is profitable can still go out of business as they may have a poor cash flow, therefore would not have any cash to pay their creditors. My making a cash flow forecast it can also allow firms to identify possible problems and take the appropriate actions. Causes of cash-flow problems could include
- over investment in fixed assets, leaving no money to pay the bills
- overtrading by producing too many goods and running out of cash
- credit sales will worsen the cash flow as it would increase sales, increase the variable costs but you will not have the money to pay for it until a later date
- stockpiling means that you would have to many assets tied up in stocks
- changing tastes as products may no longer sell
- Management errors can mean that poor market research or budgetary errors can lead to cash shortages.
There are various ways of improving the cash flow of a business
Bank overdraft
Pros
- easy to organise
- flexible
- cheaper than a loan as interest is only paid on the amount overdrawn
cons
- as its flexible it maybe difficult to budget accurately
- the rate of interest charged is usually higher than the overdraft compared to a short term loan
- fixed interest rate, so simpler to budget
- rate of interest is usually less on the bank loan compared to an overdraft
- can be set up for a significant period of time so to suit the needs of the business
cons
- interest is paid on the whole of the sum borrowed, if the business can pay the loan earlier then a loan penalty maybe charged
- collateral will need to be provided
- improved cash flow in the short term
- administration costs are lower because the factoring company chases any bad debts
- there is a reduced risk of bad debts
cons
- business will lose some revenue
- factoring company will charge more compared to a loan
- customers may prefer to deal directly with the business that sold them the product
sales of assets
- can raise alot of money
- getting rid of unused assets can reduce costs
cons
- can be hard to sell quickly
- fixed assets are used to produce goods that can be sold to create profit
sale and leaseback of assets
- overcome cash flow problem by providing an immediate inflow of money
- fixed costs can be reduced
- still have access to the asset
cons
- rent paid is likely to exceed the sum recieved, eventually
- firm owns fewer assets, so less collateral
- asset is gone when the lease ends
A firm could also improve their cash flow by…..
- diversifying its product portfolio
- anticipating change better
- setting aside a contigency fund
- controlling stock carefully to reduce the costs incurred in holding to much
sahiljhamb 