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Summary Finance
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Summary notes for finance.
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FinanceRole of the finance department:
To prepare, keep and maintain financial records for a business, such as the income
statement, balance sheet, sales figures and profit loss accounts.
To analyse the financial performance of the business and help managers understand
the businesses financial objectives and make the right decisions to achieve them.
To pay creditors and pay employees their wages.
Budgeting
Budget – a financial plan of action covering a specific time period.
All budgets should be objective driven. This means that the expected revenues and
expenditures of each department will be ultimately based on what the business is trying to
achieve.
Monitoring the budget is an ongoing procedure.
Budgeting process:
Establish the aims and objectives of the business.
Set production, marketing + financial budgets.
Next time the budget should be further broken down.
Procedures for monitoring budgets should be established.
Any variance should be examined and reacted to.
The experience and knowledge gained from setting one’s periods budgets should be
applied to the setting of the following periods budgets.
Benefits
Improved management control of the organisation
Improved financial control
Budgeting allows managers to be aware of their responsibilities.
Budgeting ensures, or should ensure that resources are used effectively
Budgeting can motivate managers
Drawbacks
Those excluded from the budgeting process may feel demotivated
If budget is inflexible, then changes in the market or other conditions may not be
met by appropriate changes in the budget
Also, an effective budget can only be based on good quality information
Zero budgeting – involves managers starting with a clean sheet – they have to justify all
expenditure made. This:
, Improves control
Helps with allocation of resources
Limits the tendency for budgets to increase for the increase annually with no real
justification for the increase
Motivates managers to look at alternative options
Variance – is the difference between the actual figure and the budgeted figure. (Actual
figure – Budgeted figure)
If the variance is positive, it is favourable (F)
If the variance is negative, it is adverse (A)
Cashflow forecasting
A cashflow forecast shows the expected flows of cash into and out of a business over a
trading period in the immediate future.
Net cashflow = total monthly inflow – total monthly outflow
Opening balance = last month’s closing balance / the money you started up with
Closing balance = net cashflow + opening balance
Cashflow forecasts is made up of:
Revenue/income
Expenses/outgoings
Balances
Opening balance has to be calculated one month at a time as they need to have calculated
last month’s closing balance.
January February March April May June
Revenue £ £ £ £ £ £
Job 240 240 240 240 240 240
Spending 20 20 20 20 20 20
money
Total 260 260 260 260 260 260
revenue
Expenses £ £ £ £ £ £
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