Review the difference between cash and profit

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Aims For Today

• Review the difference between cash and profit!!
• Understand the concept of zero budgeting

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VERY IMPORTANT RECAP!!

• Cash flow is?
• Profit is?

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VERY IMPORTANT RECAP!!

• If a business has a negative cash flow, does that
  mean it is making a loss?

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Profit Clangers!

• the business is continually making a significant
  loss going from (20,500) to (47,500)
• ..also they need to decide whether they can
  afford to run as such a loss
• ..even though they are making a loss at the
  moment they can make a profit in the future.
• And the vagueness of progressively going into
  larger negative numbers

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Common Mistakes

• NAQ Not answering the question!!
• Dont write everything you know about the
  topic.
• You MUST focus very limited time on answering the
  question!!
• Keep looking back at the question!!
• Not referring to THIS BUSINESS
• Analysing figures as if they were actual it was
  a cash flow FORECAST!!!
• Note enough analysis or evaluation (conclusion)

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Some good quotes!

• Slowly more money is coming in and less money is
  going outthe company has a possible bright
  future
• need to take action on its cash flow position
  as it is currently involved in expansion..
• the wine / food promotion will also add to the
  cash flow problemsas they will have the cost of
  the promotion on top of current cash flow
• IEDmeans more income they will have ..more
  theyll spend on items like jewellery
• The forecast is justa forecast and anything can
  change
• The cash forecast may not be accurate sales may
  not be as high as predicted

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Tips from the Top!

• Key words
• Analytical explain / examine / analyse
• Evaluative evaluate / discuss / to what extent
• Calculations
• Always include relevant formula
• Always show workings
• Label each element of your answer
• Only tackle the calculation ONCE
• Evaluative Questions
• Plan your answer
• Define the key business term
• Develop one argument as fully as possible
• Explain your second argument in your next
  paragraph
• Give your supported judgement in your final
  paragraph
• QUALITY COUNTS!

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Easy Exam Marks

• What is the definition of a budget?

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Quick Recap

• Describe one reason for budgeting
• Outline a difficulty with setting budgets
• On what basis might budgets be allocated within
  a business?
• Describe one advantage of a budget
• Describe one disadvantage of a budget

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Zero Budgeting

• How does it work?
• Would it suit Mrs Gordon..?

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Zero Budgeting

• The budget is set to zero at the start of the
  budgeting process
• Managers have to bid for a budget
• Managers must justify ALL the money allocated to
  them.

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Advantages of Zero Budgeting

• Encourages budget holders to plan thoroughly and
  carefully
• It avoids budgets creeping up each year (often
  previous years budget inflation)
• Allows businesses to identify changes in the
  needs of different areas (e.g. automated
  switchboard means budget can be reduced for this
  area)
• Can work effectively as a way of cutting the
  entire cost base of an business useful in times
  of recession

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Disadvantages of Zero Budgeting

• VERY time consuming as very detailed planning is
  needed
• This time might be better used elsewhere
  (opportunity cost!)
• May lead to high allocations to those managers
  skilled at presenting their case, rather than
  those who need the money most
• (Complete the worksheet)

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What makes a good budget?

• Consistent with the aims of the business
• Be based on the opinions of as many people as
  possible
• Set challenging but realistic targets
• Be monitored at regular intervals, allowing for
  changes in the business and its environment

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Monitoring Your Budget

• Budgets are FORECASTS or predictions of costs or
  revenues
• When the time has passed, ACTUAL figures can be
  recorded and compared to the original budget
• e.g.

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Variances

• Variance is the amount by which the actual
  results differs from the budgeted figure.
• Variance as referred to as ADVERSE or FAVOURABLE
  (NOT positive and negative)
• A favourable variance is one which leads to
  higher than expected profits (revenue up or costs
  down)
• An adverse variance is one which leads to lower
  than expected profits (revenue down or costs up)

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Adverse or Favourable
In our example
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Homework

• Read the AQA guidance sheet
• P197 Revision Questions 1 7
• Learn the definitions!