LEARNING AIM B: Understand how businesses plan for success

Topic B.2: Understand the tools businesses use to plan for success

What is Budgeting? A method of planning the use of resources and money. Forecasts where the business will be in the future. A means of motivating individuals to achieve performance levels agreed and set. A means of communicating the wishes and aspirations of senior management

Advantages of Budgeting? Forces managers to do planning Able to control what happens within the business Helps coordinate the different departments of the business Improves Communication and ideas with managers Motivates staff.

Disadvantages of Budgeting? Only estimates, not statements of facts. Need to be amended if circumstances change Preparation does not guarantee success People’s behaviour may undermine its value

Now try the Budgeting Exercise in Moodle

CASH FLOW

What is cash flow? CASH FLOW – the movement of money into and out of a business bank account INFLOWS refers to money received by the business EXAMPLES: Sales revenue Capital Loans Grants OUTFLOWS refers to money paid out by the business EXAMPLES: Purchases Rent & Rates Wages & Salaries BUSINESS

Continued… The difference between the inflows and the outflows is called the net cash flow. Positive net cash flow – Inflows are greater than out flows. Negative net cash flow – Inflows are not enough to cover out flows Cash Balance – the amount of money in a business’ account at any particular time

Continued… What will happen if a business’ net cash flow remains negative for some time? For this reason, businesses must use cash-flow forecasting to predict the cash balance at regular intervals so that action can be taken if a problem is foreseen.

Building a cash-flow forecast To build a cash-flow forecast you need to have the following information: Opening Balance - the amount of money in the business’ bank account at the start of the period Income per Period – the amount of money expected to go into the bank account in that month Expenditure per Period – the amount of money expected to leave the bank account in that month Closing Balance – the amount expected to be in the bank account at the end of the period

What are Cash Inflows? Sales Revenue Loans from banks Grants from the government

Cash Outflows Buying raw materials Paying wages Rent Interest on loans Telephone New machinery Taxes

JanuaryFebruaryMarchApril Opening Balance: Income: Sale of Burgers Enterprise grant Total income: Expenditure: Cooker500 Burgers Rolls Onions Total expenditure: Closing balance:

Now try the ‘E-Bay Designer’ Exercise then the ‘Bob the farmer’ exercise in Moodle