U5: Sources of Finance + Setting Budgets

Question 1

What are the Personal/Internal Sources of Finance?

Answer 1

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)

Question 2

What are the External Sources of Finance?

Answer 2

Bank Overdraft
Debt Factoring
Bank Loans
Venture Capital
Share Capital
Crowd Funding

Question 3

Why and when is finance
needed?

Answer 3

• Starting Up
• Growing
• Other Business Situations (unusually large order, bad debt)

Question 4

What are Budgets?

Answer 4

financial targets to be achieved in a
set period of time

Question 5

What are the Importance of Budgets?

Answer 5

• 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

Question 6

How to construct a budget?

Answer 6

1. First, work out the income budget (work out how much money the business will take from customers)
2. then, work out the expenditure budget (decide how the money will be spent: on buying stocks, marketing, employing staff, etc.)
3. then, work out the profit budget (combine the figures from the 2 other budgets)

Question 7

What are the possible benefits to First Steps?

Answer 7

• 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

Question 8

What will a new start-up find difficult and may have to rely on?

Answer 8

• 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

Question 9

What are the approaches to Historical Budgeting?

Answer 9

• 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

Question 10

What are the approaches to Zero Budgeting?

Answer 10

• 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

Question 11

What do management use budgets to?

Answer 11

• 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

Question 12

What are the Importance of Budgets?

Answer 12

1. To ensure that no department or individual spends more than the company expects, thereby preventing unpleasant surprises.
2. 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.
3. 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.
4. 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.

Question 13

What are analysed budgets?

Answer 13

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?