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Budget
A financial plan for the future concerning the revenues and costs of a business.
Historical Budgeting
Using last years figures as the basis for the new budget. They are realistic as they are based on actual results. However, circumstances may have changed (new products).
Zero-based Budgeting
Budgeted costs and revenues are set to zero. The budget is based on new proposals for sales and costs. These are more complicated and time-consuming but potentially realistic.
Measuring and Increasing Profit
Try to sell more volume - E.g. higher volume means higher revenues, selling more may result in a higher market share. This method may fail as competitors may try to respond.
Increasing selling price - E.g. higher price means higher sales as customers may think the product is of high quality, however this all depends on the price elasticity of demand. This method will work if customers stay loyal.
Increase production output - E.g. this will provide more products to be sold. This method will work if the extra output can be sold.
Reduce fixed costs and overheads - E.g. a drop in fixed costs will feed directly into higher profits. This method will work if the cost cutting does not affect the quality of the product.
Cash Inflows
These are likely to come from:
- Cash sales
- Sale of fixed assets
- A loan from the bank
Cash Outflows
- Payments to suppliers
- Wages
- Repayments on loans
Causes of Cash Flow Problems
The main causes of cash flow problems:
- Low profits or losses
- Too much production capacity
- Allowing customers too much credit
- Seasonal demand
Ways to Improve Cash Flow
Short term - cut costs, reduce current assets, increase current liabilities, sell surplus fixed assets.
Medium to long-term - improve efficiency and productivity, increase long-term liabilities, rescue spending on fixed assets.
Debt factoring - A firm buys amounts outstanding from customers, factoring firm chases the debts, gives the benefit of a short-term cash inflow.
Sale of assets - converting fixed assets into cash, can only be done once.
Delegation
The assignment to others of the authority for particular functions, tasks and decisions.
Structure
Factors that determine organisational structure
- Size of the business
- Type of business
- Management and leadership style
- The competitive environment
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