Financial planning and forecasting Flashcards
Budgeting, cash flow, suggesting improvements to cash flow, sources of business finance
What is a budget and why do people use them?
A budget is a financial plan, that tracks revenue and expenditure in a given time period
A business uses a budget to estimate and manage its finances effectively
What are budgeting aims?
- Measuring financial performance
- Financial management and control
- Target setting and performance
What is expenditure budgets?
any area of the business that incurs a cost
What is Revenue budgets?
any area of the business that generates revenue
Name the types of Expenditure budget.(6)
- Capital Expenditure
- Cash
- Labour
- Marketing
- Overheads
- Production
Give the type of budgeting that falls under revenue budgeting.
Revenue / sales
What is Budgetary control and why do businesses use it?
The process of analysing budgets to check performance against the original plan
Ensures there is no overspending or that revenue isn’t under target
Helps the business to identify any issues early
When do variances occur?
A variance occurs when there is a difference from the budget
These can be favourable (good) or adverse (bad)
What is Cash flow?
Cash flow is the movement of cash in and out of a business
What is the difference between an ‘inflow’ and an ‘outflow’?
- Inflow – money coming in to a business
- Outflow – money going out of a business
Name some Cash inflows.(4)
- Payments from customers
- Capital from investors
- Loan/overdraft from the bank
- Rental income
Name some Cash outflows.(6)
- Staff wages
- Materials
- Rent / mortgage
- Utilities
- Interest on loan
- Taxes
What happens if a business has a lack of cash?
Business has a lack of cash ➡️ Business is unable to pay bills / staff ➡️suppliers stop delivering as they have not been paid ➡️Business may be taken to court because they can’t pay creditors ➡️Business becomes insolvent (can no longer pay its debts)
What is a Cash flow forecast?
One of the key financial statements used by a business.
It is a prediction of the cash inflows and outflows for a business.
What is the main risk of a prediction?
It may change.
What are some approaches to improving Cash flow?
- Improve Inflows:
- Increase sales
- Bring forward payments
- Sell assets
- Bank loan or overdraft - Reduce Outflows
- Decrease payments/expenses
- Negotiate longer trade credit
Give the formula for Net Cash Flow.
Net Cash Flow = Cash inflows – cash outflows
Give the formula for Closing balance.
Closing Balance = Opening Balance + Net Cash Flow
Give the formula for Opening balance.
Opening Balance = Closing balance from the previous month.
What is Breakeven?
Breakeven is the point at which revenue and expenditure are equal
So the business hasn’t made a profit or a loss, it has just made enough money to cover its costs
What are the two ways to calculate the breakeven point?
- Formula
- Chart
Give the formula for Margin of Safety.
Margin of Safety = Number of sales – break-even point
Why would the business need to know their Margin of Safety?
It shows the business where they are protected from falling sales.
If their breakeven point is 50 items and they predict they will sell 100 items but only sell 75, this is in the ‘safety zone’ so they know they will still make a profit.
What can Break-even be used for?
Break-even can be used for ‘what-if’ analysis i.e. what happens to break-even if ‘x’ happens.
This helps inform decision making.
What happens to the break-even point when prices rise and fall?
Rise: Break-even goes up
Fall: Break-even goes down
What happens to the break-even point when Costs rise and fall?
Rise: Break-even goes down
Fall: Break-even goes up
Give the advantages of break-even.
- Allows businesses to calculate the minimum
number of sales needed to make a profit - Can predict the outcome if variables such as
cost or price change - Provides a target
- Helps inform decision making
- An important part of a business plan and can help an entrepreneur secure finance
Give the disadvantages of break-even.
- Based on predicted costs and revenues
- Ignores any purchasing economies of scale
that might be gained - Only shows how many sales are needed. It
doesn’t do anything towards achieving them - New entrepreneurs will find it difficult to
accurately predict costs or revenues
Why do Businesses need finance?
- To establish a new business (start up costs)
- To run the business (running costs)
- To fund expansion
Name sources of finance. (8)
- Owner’s funds
- Retained profit
- Loans
- Credit cards
- Government grants
- Hire purchase/leasing
- Trade credit
- Venture capital
What is Owners’ funds?
This is how much capital the owner has invested in the business (e.g. from personal savings)
What are the advantages of Owners’ funds?
- Doesn’t have to be paid back
- No interest to pay
- Owner has control and may be more
motivated as it is their own money - No lengthy application processes like there
would be for a bank loan
What are the disadvantages of Owners’ funds?
- May be a limited amount
- Risk to personal finance (sole
trader/partnership unlimited liability)
What is Retained profit?
This is profit from the year that is kept within a business to help finance future activities
What are the advantages of Retained profit?
- Avoids interest repayments
- Doesn’t affect the business ownership
- Internal, therefore no need to repay
- Instantly available
What are the disadvantages of Retained profit?
- Only an option if sufficient retained profit
exists within the business - May cause dissatisfaction if this is at the
expense of dividend payments to the owners
of the business - Reducing the security blanket of keeping
retained profits for unforeseen situations or to
take advantage of new opportunities.
What is a Loan?
A specific amount of money borrowed from a source such as a bank.
Borrowed for a specific amount of time with a set repayment schedule.
What are the advantages of Loans?
- Quick and easy to secure
- Fixed interest rates allow firms to Budget
- Improved cash flow
- The borrower retains ownership of the
company
what are the disadvantages of Loans?
- Interest must be paid regardless of financial
performance - A business normally provides security known
as collateral - Often more expensive than other forms of
finance - Can be charged a penalty for early payment
What does Credit cards allow a business to do?
Credit cards allow a business to receive goods or services now and pay for them at a later date.
What are the advantages of a business using Credit cards?
- Payment can be spread out over a
period of time. - This could be used to fund short-
term cash flow problems. - A new entrepreneur may use a
credit card to buy stock (e.g., to get
stock now but pay for it at the end
of the month once income has
been received from sales).
What are the disadvantages of businesses using Credit cards?
- This can be expensive as interest is
charged on the balance
outstanding on the card.
What can the government provide to businesses for specific purposes?
The government can provide grants.
From which types of governments can businesses receive grants?
Businesses can receive grants from Local, National, or European Government
What are the purposes for issuing grants to businesses?
Grants are issued to encourage businesses to:
- Provide employment or training
- Become more environmentally friendly
- Move into export markets
- Relocate to a specific area
What are the advantages of Government grants?
- Can be linked to additional support (e.g.,
training) - Do not need to be repaid
What are the disadvantages of Government grants?
- May be difficult to attract grants
- May be tied to certain conditions (e.g.,
locating in an area of high
unemployment)
What is Hire purchase?
- Spreading the cost of an asset over a period of
time - The asset is received by the business
immediately but paid for in regular instalments - After all payments have been made the asset
belongs to the business
What is Leasing?
- Paying to use an asset without ever owning it
- Maintenance costs and upgrades are met by
the leasing business - Spreads the cost over the use of an asset but is
likely to reduce profits
What are advantages of Hire purchase?
- Immediate use of the asset
- Supplier is responsible for maintenance
- Can easily upgrade to newer models
What are the disadvantages of Hire purchase?
- Costs more in the long run
- Interest charges can be high and there may be
a deposit and balloon payment
What are the advantages of Leasing?
- Can upgrade to newer models easily
- Helps resolve short-term cash flow issues
What are the disadvantages of Leasing?
- Costs more in the long run
- Is an ongoing expense rather than an asset
What is Trade Credit?
Trade Credit refers to the practice where suppliers allow businesses to pay for goods or services after they have been received.
It is a form of short-term finance provided by the supplier
What are the advantages of Trade credit?
- Provides businesses with short-term finance.
- Allows businesses to receive goods or services
immediately and pay later.
What are the disadvantages of Trade Credit?
- Businesses may miss out on discounts offered
for immediate or quick payments, leading to
increased costs.
What are Venture capitalists?
- Investment from an established business into
another business in return for a percentage
equity in the business - Also known as private equity finance
- Venture capitalists will normally look for a high
rate of return in a specific time period
What is Peer to Peer lending?
- Investment from an individual into another
business in return for a percentage equity in
the business - The business or entrepreneur may also benefit
from expertise and mentoring from the
venture capitalist or business angel - Often associated with high risk start-ups
What are advantages of Venture capital and Peer to peer lending?
- Potential for large sums of money for
investment - Expertise to help the business
- Makes it easier to attract other sources of
finance - Provides the required capital for expansion
What are disadvantages of Venture capital and Peer to peer lending?
- A long and complex process
- Expert financial projections are likely to be
required - Initially expensive for the business e.g. legal
and accounting fees - Partial loss of ownership
- Risk of conflict or perceived interference
