1.1 Identify the sources of finance available to a business.

Funding is the driving force behind every profitable projects. Businesses need capital to fund
these endeavors, which generate income. However, not all companies have instant access to
the money. The abundance of funding options makes it easier for employers to determine the
type of financing that best suits their needs.
Bank Loan
Banks and credit unions provide loans to companies large and small. When companies get a
loan from a Bank, they have access to a specific amount of money, but are bound by the terms
of payment of bank interest rates. Interest is the fee for borrowing money for the Bank, which
builds up based on the amount of the loan is used and how long the business repay the money.
HOME EQUITY LINE OF C REDIT
If the employer also owns a home, that home equity line of credit. Home equity lines of credit
are financial institutions loans give homeowners based on the amount of equity they have in
their home, and the value of their home and the mortgage current. Once applicants are
approved for home equity lines of credit, they have immediate access to funds. Beware of the
volatility of interest rates, as published August 2009 by the Federal Reserve that interest rates
on home equity lines of credit are usually variable. Sets a variable interest rate based on the
index value. As such, this type of loan requires employers to monitor closely the rate of interest.
FIND AN INVESTOR
Groups of investors or private investors look for companies that need financial assistance. The
main types of venture capitalists and angel investors. Capitalists invest money widely, with an
average investment of $ 500,000 to $ 10 million, according to an article in the magazine, "top
100 venture capital firms". Angel investors provide smaller amounts which remain significant.
Corporate investors supply capital for fractional ownership in the company. Instead of charging
interest on the amount of money loaned to businesses, investors want a share of the profits.
YOUR OWN MONEY
If employers have a savings or retirement accounts, they can benefit from another source of
funding, known as the "bootstrapping", when the employer uses personal resources to finance
business endeavours. Personal resources are the main source of financing for new

entrepreneurs most, she says, "small business administration". This also includes the use of
personal credit cards. However, credit cards have high interest rates, so it is better to use credit
cards for short-term investments that will pay off quickly.

1.2 Assess the implication of the different sources.

Sources of finance can be top secret into:

Internal sources (raised from within the establishment)

External (raised from an external source)

There are five internal sources of finance:

Owners outlay (start up or supplementary capital)

Retained income

Sale of supply

Sale of fixed material goods

Debt collected works

Owners investment

This is money which comes from the owner/s own investments

It may be in the form of start up wealth - used when the business is location up

It may be in the form of extra capital perhaps used for development

This is a long-term foundation of finance

Advantages

Doesnt have to be repaid

No concentration is payable

Disadvantages

There is a limit to the quantity an owner can advance

Retained Profits

This source of economics is only available for a business which has been trade for more
than one year

It is when the returns made are plough back into the business

This is a medium or long-term cause of finance

Advantages

Doesnt have to be repay

No interest is owed

Disadvantages

Not existing to a new business

Business may not make an adequate amount of profit to plough back

Sale of Stock

This money comes in from export off unsold stock

This is what happen in the January sales

It is when the income made are plough back into the business

This is a short-term cause of finance

Advantages

Quick way of raising speculation

By selling off stock it reduce the costs associated with investment them

Disadvantages

Business will have to take a summary price for the supply

Sale of Fixed Assets

This money comes in from export off fixed assets, such as:

a piece of apparatus that is no longer needed

Businesses do not always have remaining fixed assets which they can sell off

There is also a maximum value to the numeral of fixed assets a firm can sell off

This is a medium-term spring of finance

Advantages

Good way to raise sponsorship from an asset that is no longer needed

Disadvantages

Some businesses are not likely to have surplus assets to sell

Can be a slow method of raise finance

Debt Collection

A defaulter is someone who owes a business money

A business can raise finance by collect the money owed to them (debts) from their
debtors

Not all businesses have debtors ie those who agreement only in cash

This is a short-term font of finance

Advantages

No additional cost in success this finance, it is part of the businesses regular operations

Disadvantages

There is a risk that debts remaining can go bad and not be repaid

External Sources

There are five internal sources of finance:

Bank Loan or Overdraft

Additional Partners

Share Issue

Leasing

Hire Purchase

Mortgage

Trade Credit

Government Grants
Bank Loan

This is money on loan at an agreed rate of interest over a set period of time

This is a middling or long-term source of finance

Advantages

Set repayments are spread over a time of time which is good for budgeting
Disadvantages

Can be dear due to interest payments

Bank may have need of security on the loan

Bank Overdraft

This is where the business is authoritative to be overdrawn on its account

This resources they can still write cheques, even if they do not have an adequate
amount of money in the account

This is a short-term foundation of finance

Advantages

This is a good way to swathe the period between money going out of and coming into a
commerce

If used in the short-term it is regularly cheaper than a bank loan

Disadvantages

Interest is repayable on the quantity overdrawn

Can be high-priced if used over a longer period of time

Additional Partners

This is sources of finance apposite for a partnership business

The new partner/s can make a payment extra capital

Advantages

Doesnt have to be repaid

No concentration is payable
Disadvantages

Diluting have power over of the partnership

Profits will be come apart more ways

Share Issue

This is sources of sponsorship suitable for a limited company

Involves issuing more share

This is a continuing source of finance

Advantages

Doesnt have to be repay

No interest is to be paid
Disadvantages

Profits will be paid out as dividend to more shareholders

Ownership of the company could revolutionize hands

Leasing

This technique allows a business to obtain assets without the need to pay a large lump
sum up frontage

It is arranged through a economics company

Leasing is like rent an positive feature

It involve making set repayments

This is a medium-term starting place of finance

Advantages

Businesses can have the use of up to date tools without delay

Payments are multiply over a period of time which is good for budget
Disadvantages

Can be high-priced

The asset belong to the finance company

Hire Purchase

This process allows a business to obtain assets without the need to pay a large lump
sum up obverse

Involves paying an initial set down and regular overheads for a set period of time

The main difference between hire obtain and leasing is that with hire purchase after all
repayments have been made the business owns the positive feature

This is a medium-term source of business

Advantages

Businesses can have the use of up to date tools without delay

Payments are spread over a time which is good for budget

Once all repayments are made the business will own the advantage
Disadvantages

This is an high-priced method compared to buying with cash

Mortgage

This is a loan protected on property

Repaid in instalment over a period of time characteristically 25 years

The business will own the material goods once the final payment has been made

This is a long-term starting place of finance

Advantages

Business has the use of the belongings

Payments are multiply over a period of time which is good for budget

Once all repayments are made the business will own the positive feature
Disadvantages

This is an high-priced method compared to buying with cash

If business does not keep up with repayments the belongings could be repossessed
Trade Credit

Trade recognition is summed up by the phrase:

buy now pay later

Typical trade acknowledgment period is 30 days

This is a short-term foundation of finance

Advantages

Business can sell the goods first and pay for them later on

Good for ready money flow

No concentration charged if money is paid within agreed time

Disadvantages

Discount given for ready money payment would be lost

Businesses need to with awareness manage their cash flow to guarantee they will have
money available when the debt is due to be compensated
Government Grants

Government organisations such as endow NI offer grants to businesses, both

conventional and new

Usually certain surroundings apply, such as where the business has to locate
Advantages

Dont have to be repay

Disadvantages

Certain situation may apply eg location

Not all business may be eligible for a grant

Factors Affecting Choice of Source of Finance

The source of finance chosen will depend on a number of factors:

Purpose what the investment is to be used for

Time Period how long the sponsorship will be needed for
Amount how much money the business requests
Ownership and Size of the big business

1.3 Evaluate appropriate sources of finance for a business project.

A business faces three most important issues when selecting an apposite source of finance for
a new project:
1. Can the investment be raised from internal resources or will new finance have to be raise
outside the business?
2. If finance needs to be raised on the outside, should it be debt or fairness?
3. If external debt or evenhandedness is to be used, where should it be raised from and in which
form?
Can the obligatory finance be provided from interior sources?
In answering this question the company needs to judge several issues:
Is the amount of cash held? The company needs to consider how much in current cash and
short-term investments, and how much of that will be needed to support existing operations. In
the case of coins, this is the most obvious source of funding for the new project. If you cannot
provide the required cash in this way then the company should consider in future cash flows.
You can set up a cash balance, but probably very detailed at this stage. If the expected cash
flows of the company insufficient to finance the new project then it can consider tightening
controls on working capital improved cash position. Debtors strike to settle early, running down
inventory levels and extending the repayment period for debtors can raise cash resources. Note
however, there are dangers in such tactics. For example, customer/vendor lost goodwill and
production stoppages because of stock-outs etc. If you cannot provide the required funding the
immigration.
The current capital is gearing up for business. Although religion is attractive because of its
cheap, a blemish that attention must be paid. If too much is borrowed, then the company may
not be able to meet interest payments and principal, may follow. The level of borrowing of the
company usually measured by gearing (ratio of debt to equity) and companies must ensure this
does not become too high. Comparisons with other companies in the industry or with the
company's recent history is useful here.
Security available. Many lenders will require that assets be pledged as collateral against loans.
Provide security for borrowing from good quality assets such as land and buildings usually no
intangible assets such as capitalization of research and development expenses. In the absence

10

of good assets, security has increased borrowing is not an option. Business risks. Business risk
indicates volatility in operating profit. You should avoid companies with operating profits are
highly volatile high levels of borrowing, they may find themselves in the position of operating
profit falls and that it could not meet the interest Bill. High-risk projects funded usually stock, as
there is no legal obligation to return equal pay.
Operating leverage. The Guide refers to the company's operating costs that are fixed rather
than variable. High proportion of fixed costs of operating gears. Companies with high operating
gears tend to have operating profits are volatile. This is because fixed costs remain the same,
regardless of sales volume. Thus, if the increase in sales, operating profit increases by the
largest. But if sales volume, operating profit fell by a greater proportion. Generally, it's a very
dangerous policy combination of highly leveraged finance with high operational gearing. High
operating leverage is common in many service industries, where many are fixed operating
costs.
Monitoring the vote. Issue of shares to new investors could change the voting control of the
business. If the founding owners holding more than 50% of the capital may be interested in
selling new shares to investors outside the control of the vote in the General Assembly might be
lost. The current state of the equity markets. The Hang Seng manikombanis prices will be
reluctant to sell new shares. They feel risividoil prices are very low. This would reduce the
wealth of the owners. Note thisdos does not apply to rights issues that sold shares to existing
owners. New issues of shares on stock markets in the United Kingdom has binrari over the last
few years due to the bear market. At the time of weritingthiri is some evidence that the bear
market is about to end. After considering the points mentioned above, the company will be able
to decide between using the DIN or stock. Another important resolution should use any type of
financing, and so should be considered.
Equity Finance
A detailed consideration of the different sources of evenhandedness venture is beyond the
scope of this piece and students are not obligatory to consult their textbooks or Manuals for
more comprehensive coverage. However, here are a few general points on the subject:
For companies who have already contributed in the question of rights, mandatory under
company law matters. This means that any new shares to existing shareholders commensurate
with existing stockpiles. This is to protect the existing shareholders of the company selling

11

shares to new investors at a low price, diluting the wealth of existing shareholders. This
condition can be overcome if existing shareholders prepared to vote on the ' waiver of preemption rights.
The current situation of the company. Companies listed on the London Stock Exchange
securities "or" alternative investment market (aim), a new stock can be raised by selling new
shares in these markets through issues, offers for sale or development. Other companies who
lack the stock more difficult raising stock, you may need to resort to venture capitalists if they
require equity financing for long-term investments. Fixed borrowing rate float v many lenders
offer borrower choosing between a fixed interest rate and one floating (no changes) with the
General level of interest rates. Fixed rate borrowing may attract certainty (you know what is the
interest rate that you are going to pay) but on average it is more expensive. This is because
lenders see themselves as taking more risk on fixed rate lending as they may lose in the case of
an increase in interest rates. Generally, floating (variable) rate of borrowing cheaper.
Conclusion
It is not possible to recommend ideal source of funding for any project. What is important is that
students appreciate the advantages and disadvantages of the various methods of funding, and
can provide advice for companies.

2.1 Analyse the costs of different sources of finance

Costs of different sources of finance
Organisations need possessions for effective operation
Such possessions include machines, personnel, and money
Money as a possessions need to be managed with awareness
The need to manage economics arises because it has expenditure
Analysing cost is important for good organization and success

Share capital/owners fund

Cash dividend:- speculation cost , paid out to shareholders
share paid out depends on management, and within officially permitted constraints
For investors payment is an important source of returns
Shareholders be expecting the dividends to increase in the fullness of time and to be
consistent from year to year

12

Owners fund
Dividends: example b Mr owns 100 shares in ICI, the company will pay a lot pence per share
twice a year. If pushed ICI up 20 p per share in March and September, the cost of a business
return Mr 100 x 0.20 2 = 40 return sector (b):-instead of paying cash dividends, the
company can pay them in the form of new shares. This is called the dividend yield stripe: (for
example, instead of paying the 20 profit ICI had made Mr alternative of 2 new shares in ICI
plus 4 pounds in cash (the advantage that company reserves much more cash for use in
business

Share capital/owners fund

Costs contd:
cost of provided that financial reports
hosting annual wide-ranging meetings
assessment fees
administrative price tag of complying with legal stock switch over
requirements
for disclosure of in turn to shareholders
Costs for contribute to floatation
expenditure to issue houses, e.g. investment bank

Bank loan
Interests that is floating (fixed or variable) usually the bank rate often dictated by Government
policy and premium Bank makes a profit, if you take a loan of 100,000, and 10% interest, cost
10,000 a year and other major cost: first-order fee to cover the cost of the lenders (to prepare
the data on the computer, checking references) a charge, interest for the debt is outstanding
financial and non-financial costs:-Providing regular information to the lender for the sole traders
and business partners are required to put up personal property as security-and so the pressure
myself and damaging effects on personal life and relationships

Opportunity cost

13

Costs: for an alternate forgone

This circumstance where instead of a company paying interest of 10,000 per year, and the
company could do something else with the 10,000 income generation more for example, if
the company can spend 10,000 a year in additional advertising, this could generate 15,000
extra for profit Taking out the loan and interest payment mean that wasted an opportunity to
earn an extra 15,000 the opportunity cost the 15,000

Government grant
The costs include administrative costs of application fill out forms on a regular basis underline
the power of that business is still eligible to receive funds (revenues:-companies pay taxes on
income (profits is the cost of retained earnings, and the cost of capital (such as retained
earnings capital not needed immediately and reinvested in short will be some costs

overdraft
Costs: Often Interests, fees and higher fees May loan when the maximum is exceeded
insurance business assets May Require good credit score
Factoring
Costs: Possible harm to customers Company image distortion May impose restrictions on
the way in which you do business Reduction in mobile phones
Leasing
Costs:

Fixed interest payable Cost of leasing than purchase costs of Maintenance requirement
depending on the type of agreement Credit history check

Trade credit
Costs:

14

Sued terms Credit worth Cost and penalty if the default Can in case of non-payment

ReferenceDyson, J R (2007). Accounting for non

Accounting Students, Financial Times/ Prentice
Hall
Websites
www.aat.co.uk
www.bized.co.uk
www.ft.com
http://www.citehr.com/116640-financial-planning.html

2.2 explain the important of financial planning.

Financial planning
Definition:
Financial planning involves the analysis of financial flows of the company. that includes
predicting the consequences of investment decisions and the financing and the distribution of
profits and weighting effects of different alternatives: Van Horn You've got to be careful if you
don't know where you're going, because you might not get there. Quote from Yogi Berra

Contents of financial planning

Pro forma balance sheet Pro forma "income statement" Pro forma statement of sources and
uses of cash Description of capital expenditure planned

15

Description of why these amounts are needed and strategies to be used

Why do we need financial

planning
Effect "financial managers" Help avoid surprises Help "financial managers" to deal with the
surprises that can not be avoided Integration Evaluation of alternatives in target investment &
finance Feasibility studies TIME horizon long-term FP 3 to 5 years, but usually 5 years "shortlived" FP 12 months

Elements of financial planning

1.Sales Forecast
2.Economic Assumptions
3.Pro forma Statements
4.Asset Requirements
5.Financial Requirements
6.Plug

Steps in financial planning

process

1 Project the fiscal statement

2 resolve the Funds desirable
3 calculate the Fund ease of use
4 create System of Controls
5 Feed Back Loop- A modus operandi to adjust the fundamental plan
6 Performance Based Mgt. reimbursement System

Uses of proforma statements

- Assess : probable Performance Vs General targets
- Estimate the effect of planned operating changes, what if analyses
-Forecast firms future finance needs

16

-educated guess future FCF which determine the

companys taken as a whole value

Uses of Proforma
- used by existing and forthcoming lenders
-enables grounding of Pro forma Cash flow
Statement
-adjustment in deliberate operation, credit policy etc.,
- Weaknesses
-Past vs. Future
- Variables are mandatory to take Desired
Values

Class Task

You are granted a 50,000 (fifty thousand pounds) to start a small business as you wish. What
will you do with this money, and what should be done To small groups (15-20 minutes)

Long term planning & budgets

After preparing detailed budget for year 1, we need to bring them, and the cost of new entries
for the years 2 and 3 Adjust the projections of inflation basket prepare review detailed
financial plan and revise periodically
Financial monitoring
Importance of financial planning

Helps people plan Financial: live within their income brought allocate priorities financial
meeting expenses meet financial emergencies and reduce credit use reduce uncertainty and
conflict over finances gain a sense of independence and control save and invest to reach
financial goals

17

Sign of poor planning-overtrading

Overtrading:

(Occurs when a business tries to do too much with too little long-term capital (may encounter
problems in debt maturity (also visible in the business, and when there is a rapid increase in the
rate of rotation (rapid increase in current assets, fixed assets may be

Overtrading-signs
(The rate at which turned into cash stock and debtors are slow (increase in stocks and debt is
greater than the rate of increase in sales (may is likely to lengthen the repayment period for
creditors (exceeding overdraft limit agreed by the Bank.

Reference

a. Dyson, J R (2007). Accounting for non

Accounting Students, Financial Times/ Prentice
Hall
b. Websites
c. www.aat.co.uk
d. www.bized.co.uk
e. www.ft.com
f.

http://www.citehr.com/116640-financial-planning.html

2.3 assess the information needs of different decision makers.

Introduction
Different party in organization
require different in turn

18

According to their echelon of interest

According to their dissimilar needs

Types of decisions
Strategic conclusion: long-term, on the surface focussed, not
detailed & undertake by top level administration
Tactical pronouncement: short-term, more detailed. Internal
focussed & undertake by middle supervision
Operational decision: day to day decision, on the inside
focussed, for shop floor operation, impacts unswervingly on
customers

Types of stakeholders
Owners
Shareholders
Managers
Staff or employees
Customers
Suppliers
Community
Government
I= Internal
E= External

Stakeholders
(Shareholders/owners;-(classified as internal party (interested in profitability (profit attributable to
shareholders (asset base (NET/Organization (the availability of cash for future expansions

Managers

19

 Act on behalf Responsible shareholders (agents) to strategic decision-making Responsible

for planning Controlling Organizing responsible owner (s) Interested in performance and
growth business Interested Interested external information in business profits
Employees
(Interested primarily in salaries (other benefits of employment (employment security (corporate
profitability (future expansion plans (those wishing to profit & loss account information

Bankers/Lenders
(Interested in the following information (the liquidity of the company (profit (coverage of benefits
(the ability to pay interest and loan (fixed asset base (leveraged company (wanting budget
information and cash flow
Suppliers
Firms get the resources they need to produce goods and services from suppliers Businesses
should have effective relationships with its suppliers in order to get quality affordable resources
this two-way process, suppliers depend on companies that supply Interested in cash flow for
business Interested in ability to meet payment obligations in due time

Customers
Customers purchase goods or services produced by the companies They may be individuals
or other companies, Firms must understand and meet the needs of their customers, they will
fail to make a profit, in fact, survive interested in the quality of the product/service information

Community

Firms and societies that existed in the local bilateral relationship has been the community
often provide many company employees and clients often supply business the goods and vital
services to local area But sometimes can feel aggrieved by some community aspects of
company interested in Support organizational moral commitment to the environment and
corporate social responsibility
Government

20

Profit earn to assess the proceeds

tax payable
conformity with authoritarian bodies
Creation of employ
Contribute to trade and industry growth
Support for atmosphere
Green issues and environment change
Interested in turnover and loss account
Statement

Financial statements
Financial statements are fashioned
as:
conformity to the law, companies
Act 1985
To let somebody know stakeholders about its
Operations
To help administration in decision
making
Made up of:Balance sheet
Profit & hammering account

Balance sheet
A snap shot of an entitys economic
position at a unambiguous date
Matches material goods owned and used by
an individual (incl cash)
Against investments applied to secure
the belongings (all debts + equity)
Assets =equity + liabilities

Profit and loss account

Gives an account of proceeds generated and operating cost incurred over given period

21

The period given depends on rationale of account

First part details the returns from sales and the expenditure associated with it-to arrive at gross
proceeds
The second part contain deductions and supplementary income not linked to sales to arrive at
net proceeds

Cash flow statement

Explains change in cash balances over a period of time by identifying all sources and uses of
ready money
Sources- any actions that brings hard cash into the firm e. g. sale of utensils
Uses any commotion that causes cash to leave the firm, e. g compensation of taxes

Impact of finance on financial

statements
Organisations require funding for different purposes for investment in new equipment or
machinery finance To grow or expand To meet short term/long term To pay debt obligations
or tax or other commitment Can come from internal or external sources Other identified
sources mentioned previously in the case of previous topics Each will have an effect on one or
more of the financial statements

Impact of finance on Fin Statements

SOURCES OF

BALANACE

PROFIT & LOSS

CASH FLOW

FINANCE

SHEET

ACCOUNT

STSTEMENT

Money

Increase the

May increase

borrowed from

current asset in

cash

families &

bal sheet (cash)

available

friends

Shown as short
term liability

Bank loan

Affect current

Affect P&L

Affect

asset-cash &

expenses

available

22

long-term

(interest)

liability in

cash
(increase)

b/sheet

Sales of fixed

Affect fixed

Affect revenue in

Increase

assets

asset value in

P& L (Sales

available

b/sheet

income)-profit

cash

(reduce)-

may be affected

increase cash
(current asset)

Sale of stocks

Affect current

Affect sales

Affect

asset in

revenue &

available cash

balance

profit or loss

in cash flow

N/A

Affect available

sheetreduces stock
value and
increase cash

Additional

Affect equity

capital from

value & current

new partners

asset (cash)

Debt collection

Affect liability

May affect sales

May affect cash

on b/sheet

revenue acct-if

flow statement

(reduce)-

source from

increase current

sales

cash

asset value
(cash)

Sale of new

Affect equity

May affect P& L

May affect

shares

account &

if share are sold

available cash

23

Sources of

Balance sheet

finance

Trade credit

Affect creditors

Profit & Loss

Cash flow

A/c

Statement

N/A

N/A

N/A

Increase

a/c in balance
sheet (increase)
and increase
current asset
(stock)

Retained

Affect equity

earning

account

available cash

(increase

in cash flow

reserve) and
affect current
asset (cash)

Government

Increase current

grant

asset (cash)

N/A

Affect available
cash in cash
flow

Reference
non-Accounting students, Prentice Hall
Atrill & McLaney (2004) Accounting
and Finance for non-Specialists, Prentice
Hall
BPP, Managing Financial Resources, Core Unit 2
www.bized.co.uk

24

2.4 explain the impact of finance on the financial statements.

Keep a record of the year business (trading, profit and loss account) the financial statements
show the financial position of the business date (balance sheet). Get funding from various
sources of change in the financial statements. This part of the report, how is the registration of
each source of funding and the impact on the financial statements.

Personal savings
When personal savings are made for business loans. You will see the amount lent as long-term
liabilities on the balance sheet. If any interest payments that will be recorded in the profit and
loss account and deducted from the profits.
Sale of assets
The sale of assets will reduce the value of the fixed asset in the balance sheet. The profit or loss
will be recorded on the sale of assets in the profit and loss account for the year. Asset
depreciation will be removed along with the original value of the balance sheet.
Ordinary shares and preference shares
Issue of ordinary shares and preference shares increase vale capital on the balance sheet. If
the market price of the issued shares of the nominal value of the share and also is increasing
the share of premium in the balance sheet. Is also showing the number of shares issued in the
public budget, and preference shares, shows the rate of return. And dividends paid to
shareholders after tax appropriation of net profit.
Venture capital
This is the amount of money invested in the business as capital, and so comes under capital in
the balance sheet. Back to venture capitalists is a payout that is registered in the account.
Factoring and invoice discounting
This does not appear on the balance sheet. However you can show funds from factoring and
invoice discounting high cash balances. Interest charges and fees are recorded in the profit and
loss account.

25

Reference
a. Sources-of-Finance

3.1 analyse budgets and make appropriate decisions.

Budgets and budgetary control
budgets are a economic and/or quantitative

statement, recitation to a defined time period,

stating the plan with systems of joystick over

it so as to accomplish the set objectives or plan

variances are basically deviation from set plan

[or budget] which may be either sympathetic

denoted by [F] or undesirable denoted by an [A]

Merits and Demerits

merits: integrates complete business & motivate

facilitates announcement & co-ordination

allows for development & control, could lead to

better presentation [MBO] & a performance

measure & reward apparatus of some sort

demerits: inflexible, awkward, outdated,

a rule than a tool, non value-adding etc.

Types Of Budgets

26

 fixed budgets are in the main inflexible & rigid,

they are as a rule set within a relevant range

theyre non-adaptive, developing or responsive

use for monitoring & control within huge firms

flexible budgets on the differing, quick to respond,

i.e. responds to asking price behaviours, adaptive,

use in strategic diplomacy & tactical exercises

Fixed budget

Constructing a fixed financial statement

Adopt the subsequent steps for fixed budget

time-honoured desired level of activity (1 level only)

Establish costs of machinery [matl, labour]

establish cost behaviours [by components]

Determine the system to adopt [vertical etc]

Ensure the arrangement identify the followings;

The direct price tag, gross profit, net income etc

Example fixed budget

establish the cost per learner per month using the data below:

No of learners at the college

1000 learners

No of learners per classroom

40 learners

Cost of book bag each learner is issued with

200 each

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Tutors per pay hour

20 per hour

No of teaching hour per week [4 wks per mth]

32 hours

Monthly overhead [principals salary]

20,000

Other monthly overhead cost per month

16,000

solution: fixed budget

Suggested solution [fixed budget]

Direct material [1000 x 200/learner

200,000

Direct labour cost [working note 2 below]

64,000

Overheads [20,000 +16,000]

36,000

Total cost of providing lectures

300,000

Average cost per learner [300,000/1000

300

[wk 1 no of tutor [ 1000 learners/(40 learners per class =

25 tutors

[wk 2 tutor pay [25 tutors x 32 hrs/wk x 20 per hr x 4 wks] =

64,000

Constructing a flexible budget

adopt the following steps for elastic budgets

conclude the level of movement to budget for

create the cost per constituent to be used

E.g. material, labour and optical projection

conclude the cost behaviours [ by component]

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Determine the layout to adopt [vertical etc]

Format to state, unswerving cost, gross and net profit

Example flexible budget

Prepare flexible budget for activity levels [1000, 2000, & 2500]
No of learners at the college

1000 learners

No of learners per classroom

40 learners

Cost of book bag each learner is issued with

200 each

Tutors pay per hour

20 per hour

No of teaching hours per wk [4 wks per month

32 hours

Monthly overhead: principal salaries

20,000

Other monthly overheads per month

16,000

Solution: flexible budget

Suggested solution [flexible]

1000

2000

Direct materials [200 each]

200,000

400,000

Direct labour

64,000

128,000

overheads

36,000

36,000

Total cost of lecturing

300,000

564,000

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Average cost per learner

300

282,000

[w.1 no of tutor [1000/40 learners per class =

25 tutors
[w.2 tutor pay (25 tutors x32 hrs/wk x 20/hr x
4 wks) = 64,000

What to note: flexible budget

stuff costs increases by 200 per student

labour expenditure increases by the no. of learners

caused by? no. of classes & tutors obligatory

integrate & motivates, overhead is invariable

total costs increases with bustle [AC drops]

why? total FC is unchanged in relevant range

there are no incomplete tutors [so, round up!]

Summary
budgets may be describe as revolutionary plans

fixed budgets are rigid [i.e. non-responsive]

flexible budgets act in response to the activity levels

cost per unit declines as the commotion level rises

fixed budgets are used in unwavering environments

it is also number one & used by the government

use flexible budgets in shifting conditions

Practice Question
Each product consumes materials worth

50.00

Each labour hour is paid at this rate

10 per hour

Each worker works standard hour per wk of

32 hours

30

How many weeks are there in a month

4 weeks

Total overheads per month

26,850

Q.1 prepare a flexible budget at 800, 2500 & 5000 activity

levels
Q.2 which activity produces the lowest cost per unit?
Q. 3 why is this the case [provide a reason for your choice]

Types of budget
Cash vs Zero-based
cash budgets reproduce cash movements only

forecasts future cash location or requirements

they do not match the earnings forecasts & may

start with cash famine [overdraft] or surplus

zero-based budget start from a zero base

each period & requires mgs. to justify wishes

for reserve each year [promotes efficiency]

Features of effective budgeting

1. truthful forecasting
2. Based on organisational aim
3. in sequence is timely and accurate
4. fashioned with multilevel input
5. standard reviews are built-in

Problems with budgeting

The progression is too long

There is a grouping of game playing

Business decisions revolutionize but the budget does not

People in charge of budget are held responsible in areas where they have no
responsibility

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Applying an subjective proportion to prior period actual

Uses of budget

To stay surrounded by a limit

For have power over purposes

For forecasting

To entrust

To prioritise Wants,& classify Needs,

Within the territory of what we Can

Reference

Dyson (2007) Accounting for non-Accounting students, Prentice Hall

Atrill & McLaney (2004) Accounting and Finance for non-Specialists, Prentice Hall

BPP, Managing Financial Resources, Core Unit 2

www.bized.co.uk

http://en.wikipedia.org/wiki/budgeting

en.wikipedia.org/wiki/zero_based_budgetting
http://en.wikipedia.org/wiki/personal_budget

3.2 explain the calculation of unit costs and make pricing decisions using relevant
information.

Costs & cost calculations

cost classifications: direct outlay & prime expenses

cost classifications: indirect overheads & total overheads

cost behaviours: fixed expenses [meaning & uses]

variable overheads [its meaning & applications]

semi-variable outlay [meaning & applications]

presenting expenditure behaviours using diagram

Direct costs & prime costs

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 means? cost appreciable to product or examination

meaning? its fluctuate with volume of output

express costs consists of direct material costs

nonstop labour & direct expenses [e.g. delivery]

most important costs consists of the total direct costs

i.e. [material + labour + any through expenses]

so, prime cost is the same as shortest cost? yes!

Indirect Costs & Total Costs

i.e. costs not particular to product or service

circumlocutory costs consists of indirect material costs

[e.g. cleaning materials], indirect employment cost

[e.g. salary, bonus pay] & circumlocutory expenses

[e.g. rent, indemnity, repairs, publicity etc.]

the total outlay = [total direct & indirect costs]

i.e. [direct expenses + indirect costs] = total costs

Fixed Costs & Variable Costs

fixed price tag do not change with movement levels

i.e. cost remains predetermined within a relevant range

but in the long-run, all costs become up-and-down

uneven costs adapt to the levels of activity

states that costs increases per unit as commotion

levels jump down [i.e. fixed costs over more volume]

as volume rises, the total common cost drops

Diagram-fixed cost

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Semi Variable Costs

this is a assortment of both fixed & variable costs

example: cellular phone cost [i.e. fixed land line]

- a portion of the asking price is fixed [i.e. line rental]

- the other portion is changeable [the no. of calls]

what to do with mixed costs when scheduling:

- separate the total cost into unchanging & variable

- use high & low process or regression chemical analysis

Cost-plus pricing- company adds a certain entitlement on the cost of producing its
product to set the business price

Skimming method- makes a high profit at the onset to cover investigate cost offering
reduced numbers. Used by electronic commodities and other tech product e.g. Apple ipads and i-phones

Penetration pricing: offering low prices in order to gain so many clients at the
commencement. The aim is on wider acceptance and increase souk share and
competiveness. This is a very good entry approach where competition is high and
intense

Target pricing: used for intended or unambiguous purpose e.g. to enable a singleminded rate of homecoming on investment for a scrupulous period of time- used by

34

companies whose capital speculation is high e.g. energy companies or sports car
companies

Reference

Atrill, P (2009) Management Accounting for Decision Makers 6th Edn. Prentice Hall

BPP Managing financial resources core book unit 2

www.globusz.com/ebooks/costing/00000010.htm

http://en.wikipedia.org/wiki/cost-centre

http://en.wikipedia.org/wiki/operating-cost

www.bized.co.uk

3.3 assess the viability of a project using investment appraisal technology.

Investment Appraisal

A means of assessing whether a worthwhile investment project or project Investment can not
be buying a new PC for a small company, a new piece of equipment in the manufacturing plant,
and a completely new factory, Used etc in both the public and private sector
Types of investment
appraisal

Accounting period Payback rate of return (ARR) rate of return (IRR) Internal NET
Profitability indicator "present value (discounted cash flow)

Investment appraisal
I do a investment companies? The Importance of remembering as a purchasing capacity do
not buy stocks, bonds or investment bank! Buy equipment/machinery or building a new plant
for: Increase capacity (quantity that can be produced) which means: Demand can be
achieved and this generates sales revenue Increased efficiency and productivity Investment
therefore assumes that investment will produce future revenue streams to assess Investment
is all about evaluating these streams of revenue against costs Not investing science! The

35

payment method generates the length of time it takes to pay off the initial capital cost
information Requires to return investments 600,000 It cost machine produces elements that
yield a profit of 5 each to produce 60,000 units per year will be Payback period 2 years
Payback could occur during Can generally take into account the reduced cash flows from
investment to days
Why do companies invest?
Importance of remembering
investment as the purchase of
productive capacity NOT buying
stocks and shares or investing in a
bank!
Buy equipment/machinery or build
new plant to:
Increase capacity (amount that can
be produced) which means:
Demand can be met and this generates sales revenue
Increased efficiency and productivity
Investment therefore assumes that the investment will
yield future income streams
Investment appraisal is all about assessing these
income streams against the cost of the investment
Not a precise science!

Pay back method

The length of time taken to repay the initial
capital cost
Requires information on the returns the investment
generates
e.g. A machine costs 600,000
It produces items that generate a profit of 5 each on a
production run of 60,000 units per year
Payback period will be 2 years

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Payback could occur during a year

Can take account of this by reducing
the cash inflows from the investment
to days, weeks or years
Days/Weeks/Months x Initial Investment
Payback = ---------------------------------------Total Cash Received
e.g.
Cost of machine = 600,000
Annual income streams from investment
= 255,000 per year
Payback = 36 x 600,000/765,000
= 28.23 months
(2 yrs, 6 months)
INCOME STREAMS
YEAR 1

255, 000

YEAR 2

255, 000

YEAR 3

255, 000

Accounting rate of return [ARR]

A comparison of the profit generated
by the investment with the cost of the investment Average annual return or annual profit
ARR =
-------------------------------------------Initial cost of investment

An investment e.g. is expected to result in cash outflows of 10,000 a year for the next five
years the initial cost of investment profit Total 20,000 and 30,000 annual profit: = 30000
pounds/5 = 6000 ARR = 6000/20000 100 = 30% A return worthwhile? Net present value
NPV Takes into account the fact that money values change with time How much will you
need to invest today earn x amount of time? Value of money affected by interest rates NPV
helps to take these factors into account returns shows you what is your investment would earn

37

in alternative investment e.g-project 150,000 costs After 5 years cash = 100,000 (10%)
If you had invested 1 million to the Bank offers interest of 12% will be the largest returns might
be better off to reconsider your investment! The principle: How much you will have to invest
now earn 100 in one year if the interest rate is 5%?

Net present value

Future Value
PV = -----------------(1 + i)n
Where i = interest rate
n = number of years
The PV of 1 @ 10% in 1 years time is
0.9090
If you invested 0.9090p today and the
interest rate was 10% you would have 1
in a years time
Process referred to as:Discounting Cash Flow
Cash flow x discount factor = present
value
e.g. PV of 500 in 10 years time at a rate
of interest of 4.25% = 500 x .6595373 =
329.77
329.77 is what you would have to invest
today at a rate of interest of 4.25% to earn
500 in 10 years time
PVs can be found through valuation tables (e.g. Parrys Valuation Tables)

Internal rate of return IRR

Allows the risks associated with the investment project to be assessed is the IRR the interest
rate (discount rate) that makes the net present value = zero value helps us measure Allows
the investment firm to assess whether the investment in the device, and so will yield the best
return based on internal criteria for comparison Allows return of projects with different initial
expenses Set allows cash flows to different discount rates Software or simple charts to find
the internal rate of return

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Profitability index

Allows comparison of the costs and benefits of different evaluation projects and thus allow the
decision-making be undertaken "net present value" index =-profitability-considerations Key
"investment cost of initial capital" for companies looking to use: Ease of use/simplicity required
Degree Extent of precision required which could be future cash flows accurately measure
Extent of future interest rate movements that could be taken into account, he predicted
factoring in inflation raised the Necessity of making Investment long-term decisions requires
special attention because of the following reasons:-Effect They finance the steady growth in
the long term They affect risk It firm involves the commitment of considerable amount of
investment decisions They are irreversible, and in large loss They are among the toughest
decision to make benefits Future need detailed evaluation because they are difficult to predict.

Advans & disadvans of payback period

Simple to use and gives an overview on how long it will take to recover the investment May
be useful where a relatively short time scale Help determine how fast the cash flow has
become positively Useful project where companies cash flow problems: defects Can give a
simplistic mode Does not take into account the fact that future returns may be less than the
value of the ignore the qualitative aspect of resolution Does defects recovery period does not
look at how many are created after the rear Does not look The profitability of the project and
compare the return with the initial investment
Take no account of interest rate
ACCOUNTING RATE OF RETURN:
ADVANTAGES

Shows the profitability of investment clearly use Take into account the interest rate factor
Can compare alternative draft show differences in return-ARR defects Does not take into
account that future returns may be less than the value of Ignore does not consider the
qualitative aspect of resolution Does how long it takes to recover the initial investment shows a
net present value/DCF-advantages of profitable investment clear Take into account the

39

interest rate Allows a return in the future could be less than the value of defects: Ignore quality
do not consider side Does how long it takes to recover the initial cost of investment

Reference
BPP, Managing financial resources, core unit 2
http://www.financial.kaplan.co.uk/Document/ICEAWMI_c
h3_p.pdf
www.businessstudiesonline.co.uk
www.revisionworld.co.uk/files/investment

4.1 discuss the main financial statement.

The financial statements include the four key small business income statement, balance sheet,
cash flow statement, statement of owner's equity. Private businesses and small businesses do
not need to prepare financial statements. However, if they want to go or need financing, a set of
financial statements will come in handy. Data that help small business owners collect their
financial records, and compare current performance against prior periods and the industry
average. The income statement is the basic components of the income statement revenue,
expenses, and profits. Usually appears in the top line revenues and bottom line shows the net
profit or loss. Companies incur losses if expenditures exceed revenues. The size and
complexity of the company determines the number of items in the income statement, but the
main categories that include sales and operating costs and non-operating expenses. Gross
profit equals Sales minus cost of goods.
Balance Sheet

The components of the balance sheet of assets and liabilities and owner's equity. Asset is
displayed on the left side while the other two appear on the right side. The basic accounting
equation States that assets must equal total liabilities and owner's equity. Assets include current
assets such as cash, inventory, fixed assets, such as plants and other properties. Include

40

liabilities short-term liabilities, including liabilities accounts payable, long-term, such as bonds. A
small business may not have any long-term debt. Equity section of the balance sheet holders
may contain only the ending balance for the period because it shows the ending balance in the
account statement of owner's equity.
Reference

Dun & Bradstreet Credibility Corp.; Financial Statements for Small Businesses; Tim Devaney,
et al.

San Joaquin Delta College Small Business Development Center: Get a Handle on Your
Business Finances

University of Arkansas at Little Rock, Arkansas Small Business and Technology Development
Center: Understanding Financial Statements: What Do They Say About Your Business?

AccountingAide: Statement of Owner's Equity

4.2

There are three types of financial statements: income statement, balance sheet and cash flow
statement. Each of these financial statements show a different aspect of the business. However,
correctly understand the financial health of the business, all the three financial statements
should be studied together. Each financial statement can show potential problems or
weaknesses that are evident in other data. There are standard forms that are used for each of
the three financial statements.

BASIC INCOME STATEMENT

The basic form of the statement of income on income first, followed by the expenses. Expenses
are subtracted from revenue to calculate the net income of the business. This is a statement of
income used by most service providers and others that did not cost of goods sold for the
services they use to create simplified profit more. If there is a cost of goods sold, income
statement, statement of participation.

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INCOME STATEMENT FOR RETAIL OR M ANUFACTURING

Income statement-shop retail or manufacturing process is very different from the statement of
service. In the income statement, the first line of gross income or revenue, followed by
subtracting the cost of goods sold or manufactured. This provides the amount of gross income.
The second section of the income statement lists all expenditures associated with SG & amp; A,
parts sales and General and administrative business. This is subtracted from the gross income
reveal operating income. The last section presents expenditure and interest expense and taxes
to net income from other businesses.
BALANCE SHEET

The balance sheet shows the assets, liabilities and shareholders ' equity & # 039;. Total assets
must equal total total liabilities and shareholders equity & # 039;. Section I of the balance sheet
lists all the assets. This includes cash, investments, real estate and other commercial
equipment and stores. The following section lists the liabilities, or what the company owes to
others. This includes any loans or accounts payable. The last part of the shareholders & # 039;
equity is the difference between total assets and total liabilities.
Reference

Investopedia: Understanding the Income Statement

Investopedia: Balance Sheet

Investopedia: Cash Flow Statement

4.3 interpret financial statements using appropriate ratios and comparisons, both internal and
external.

"In spite of constraints analysis is widely used as a tool to assess past performance and predict
future successes or failures of entrepreneurs."

Ratio analysis is not just picking different

numbers of balance sheet and income statement and statement of cash flows and compare.
Ratios compare the facts against previous years, industry, other companies, or even the
economy generally. Consideration of the relationship between the values of rates and contact
them to find out how the company's past and future. Themes and trends the chronology of these

42

ratios can be used to make conclusions about the financial position of the company and its
operations, as well as attractive to investment. Financial ratios are calculated from one or more
pieces of information in the financial statements of the company. Investigate thoroughly the
financial position of the business, and can help decide whether.
1) as they collect data from the published accounts of foreign companies) the confidentiality and
accuracy of scanning for comparisons between companies. Users analysis are not only senior
management and all levels of management are "financial ratios. It depends on the company and
the use, factors that depend on company size and nature of the company. However, the
Department always requires an analysis of previous data for the company and its performance
in order to maximize profit and loss prevention. Due to the Administration to decide on a daily
basis and therefore it was not satisfied with the analysis of yearly or quarterly. It requires up-todate and useful financial information to make decisions on a daily basis. Given the financial
information requested and used at all levels, can decide what information is relevant to each
level and filter and flow of financial information.
You can also use financial ratios assess the risk factor to investors, predicting bankruptcy.
Liquidity ratio used non-bank credit to companies undergoing a difficult time. Is used for nonbank company where the company could not get more loans from the banks. This is supposed
to be a greater risk as if the company cannot repay the loan to the Bank, and maybe they will
charge higher interest. Interest payments are subject to initial profits for the company (as some
financial analysts), where you must calculate interest as a percentage of sales from that
company, or alternatively the total costs as a percentage of the profits of the previous year. The
analysis of these ratios affect decision makes investing in any company. Now let's talk about
the use of hierarchy in companies.
Public administration with the task of significantly close to the production manager. Its role in
predicting and anticipating future company is important because it compared rates this year
than in the previous year and see whether it has been increased public expenditure. Now you
can not only be general expenses raw materials etc. can occur.But also from the perspective of
technological devices. Explains the Tamari (1978) reduce costs if companies give large output
proved to be beneficial to the company's performance. Executive management is requiring
nearly all the collected information to financial analysis. They have to keep an eye on everything
from what the production manager to get shareholders. They get information from previous
years for the company as well as the comparison between companies similar to theirs.

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44