Business Management Techniques

Assignment 2

Select and Apply Costing

Systems and Techniques

Business Management Techniques

Business Management Techniques
Manage Work Activities to Achieve
Organisational Objectives Assignment 3
Analyse
By Steve Goddard the key functions of financial planning and
control

By Steve Goddard
 Acknowledgements

David Sullivan – Supplier of lecture resources.

Mike Tooley & Lloyd Dingle – For there book on higher national engineering.

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 Table of Contents

Section Description Page

1 Task 1 7
2 Task 2 13
- References 16

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 Task 1 – Identify and describe appropriate Financial Planning Processes.
Looking at short medium and long term plans, strategic plans; operational
plans; financial objectives and organisational strategy.

Financial Planning Processes

Short Plans

Short-term financial decisions differ from long-term financial decisions in two important ways. First, they are
easily reversed in most cases. Second, there is far less uncertainty about the decision variables as you are
concerned with the next few months rather than years. This does not mean that short-term financial decisions are
any less important. Short-term financial decisions ensure the firm's liquidity and are critical to the short-term
survival of the business.

Firms finance their operations from short-term and long-term sources. Although short-term financial decisions
almost always involve short-lived assets, there is a linkage between short-term and long-term financing decisions
arising from a firm's cumulative capital requirements. If you have a surplus of long-term financing, you would
need less short-term funds. Ordinarily, financial managers try to match the maturity of capital sources with the life
of the assets funded by them. For example, some minimum level of working capital is needed permanently in the
business and is financed from permanent sources, whereas the seasonal increase in working capital typically is
financed from short-term sources.

The primary short-term funding sources are loans from commercial banks and direct market borrowing through
commercial paper issues. Commercial banks provide different types of loans and lines of credit and remain a
major source of funding for corporations, though their market share has decreased significantly in the last two
decades.

Example of a short term financial plan which shows a bank loan:

1st 2nd 3rd 4th

Newborrowing
1. Bank loan 38.0 0.0 0.0 0.0
2. Stretching payables 3.5 19.7 0.0 0.0
3. Total 41.5 19.7 0.0 0.0
Repayments
4. Bank loan 0.0 0.0 4.3 33.7
5. Stetched payables 0.0 3.6 19.7 0.0
6. Total 0.0 3.5 24.0 33.7
7. Net new borrowing 41.5 16.2 -24.0 -33.7
8. Plus securities sold 5.0 0.0 0.0 0.0
9. Less securities bought 0.0 0.0 0.0 0.4
10. Total cash raised 46.5 16.2 -24.0 -34.1
Interest payments:
11. Bank loan 0.0 1.0 1.0 0.8
12. Stretching payables 0.0 0.2 1.0 0.0
13. Interest on securities sold 0.0 0.1 0.1 0.1
14. Net interest paid 0.0 1.2 2.0 0.9

16. Cash required for operations 46.5 15.0 -26.0 -35.0

17. Total cash required 46.5 16.2 -24.0 -34.1

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Strategic Plans

Business Angels

Business angels are wealthy individuals who invest in start-up and growth companies in return for equity in the
company. The investment can involve both time and money depending upon the investor.

Typically business angels have already made their fortune through other business ventures, possibly their own
start-up or a career in business. Most are men aged between 45 and 65. However, investors can be younger –
particularly in the technology sector.

Business angels can operate independently, but many work as a syndicate. This is because 40% of all angel
investments are lost. Only the top 20% achieve more than a 50% return. To avoid losing a lot of money on one
big deal, an investor needs to make a number of investments and spread the risk.

The British Business Angels Association (BBAA) estimates that business angels invest roughly £300 million
every year. BBAA research has indicated that business angels invest more in early stage businesses than formal
Venture Capital Funds.

The term business angel covers a wide range of individuals investing varying amounts of money at different
stages of business development. In general there are six different types of investor:

• Virgin. Has not yet invested

• Latent. Has not invested in the past three years
• Wealth maximising. Experienced businessmen and women investing for financial gain
• Entrepreneur. Backs businesses as an alternative to stock market investments
• Income seeking. Invest for income or to gain a job
• Corporate. Companies that make regular investments,
often for majority stakes.

Business angels are a vital tool used to fill the gap between
venture capital and debt finance – particularly for start-up and
early stage companies.

They also provide a useful source of equity finance – where the

investor takes a stake in the company in return for a cash
injection – for relatively small amounts that would not otherwise
be available through venture capital.

Investments can be anywhere between £10,000 and £250,000

although in practice most investments are in the region of
£25,000. In addition to a first investment, business angels often
follow up with later rounds of financing for the same company.

As well as cash, business angels can offer years of experience

in the business world. Although some prefer to become a
sleeping partner, others will get actively involved in your
business from writing a marketing plan to taking the company
through a flotation on the stock market.

One of the most common faces of business angels would be the TV show Dragons Den in the picture above.

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Venture Capitalists

Venture capital is also known as private equity finance. Unlike business angels, venture capitalists (VCs) look to
invest large sums of money in return for equity in - ie a share in the ownership of - your business.

VCs typically invest in businesses with:

• a minimum investment need of around £2 million, though many smaller regional VC organisations may
invest from £50,000
• an ambitious but realistic business plan
• a product or service that offers a unique selling point or other competitive advantage
• a large earning potential and a high return on investment within a specific timeframe, eg five years
• sound management expertise - although VCs tend not to get involved in the day-to-day running of the
business, they often help with a business' strategy
• a proven track record - for this reason, VC's generally do not consider start-ups for investment

The advantages of securing a VC are that they can provide large sums of equity finance and may bring a wealth
of expertise to your business. Also, if you successfully attract a VC to your business, you're likely to find it easier
to secure further funding from other sources.

The disadvantage is that securing a deal with a VC can be a long and complex process. You'll be required to
draw up a detailed business plan, including financial projections for which you're likely to need professional help.
Support from your local Business Link may be available for this. Also, if you get through to the deal negotiation
stage, you'll have to pay legal and accounting fees, whether or not you're successful in securing funds.

There are several VC associations. The following are two of the best established:

• The British Private Equity and Venture Capital Association (BVCA) - the BVCA helps larger businesses
locate venture capital companies.

• The European Private Equity and Venture Capital Association (EVCA) - this organisation provides
information and networking opportunities for investors, entrepreneurs and policymakers in the equity
finance industry.

Mortgages

A commercial mortgage is probably the best way to finance the purchase of buildings and land for business
purposes, it provides the most flexible and affordable finance solution.

Commercial mortgages are specialised due to the fact that the lender has a legal claim over the property until the
loan has been repaid in full.

Mortgage loans of this type are tailor made for purchasing any commercial property used for business purposes
including shops, factories, offices and warehouses. Commercial mortgages can also be used for taking over an
existing business, purchasing a brand new building or buying land.

Although they often come with higher interest rates and more variables than residential mortgages, commercial
mortgages are more flexible and can carry extra incentives for borrowers. With commercial mortgages, the lender
has a legal claim over the property until the loan has been fully repaid.

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Benefits

A commercial mortgage provides your business with a major asset that is likely to increase in value and offers a
wide range of additional benefits. These include:

 The opportunity to consolidate expensive short-term finance

 The ability to raise money for working capital or an injection of cash flow
 A reduction in the costs of an existing commercial mortgage
 An opportunity to increase your earning potential through refurbishing, improving or expanding your
business property
 Avoidance of exposure to just one lending source for both business banking and property investment
 Mortgage repayments may be similar to rental payments - therefore no need to budget for additional
property expenditure or any increase in rent
 The interest on a commercial mortgage is tax-deductible

Disadvantages

A commercial mortgage is a long-term commitment and, similar to a residential mortgage, will need to be paid off
over a period of 15 years or more.

However, it is vital to ensure all repayments are made on time. Failure to so will accrue additional interest and, if
you continue to default on payments, can lead to your property being repossessed and a poor credit status.

Loans

Business loans are commonly used by business owners to access cash needed for business start up, growth or
improvement. There are a wide variety of programs and lenders available, so it’s important to understand your
specific needs and pursue a loan that fits your situation.

A business loan is a financial tool available to business owners of all sizes who need funding to enhance their
business. Small businesses and start-up businesses typically have a more difficult time securing a business loan,
but it is certainly not impossible. Regardless of your business size, any lender you work with will want to see firm
documentation that supports the viability of the business as well as the purpose for the loan.

Business loans can be used for many things. Some common uses include start up costs, expansion of the
business, capital investments, and refinancing of business debt. Most business owners will pursue a business
loan at some point because it is common to need additional funds at various stages of business development.

Banks are a common source of business loans, but they are often more conservative in their lending decisions.
For this reason a bank is much more likely to underwrite a loan to a larger or more established business. It’s not
impossible to get a loan from a traditional bank if you’re smaller or just starting up, but you will usually need to
provide more extensive documentation of your business plans.

There are many other sources of business loans in the UK, so do some research on other lending sources. There
are lenders and angel investors that specialize in small or start up loans, as well as venture capitalists seeking
larger investment opportunities. Additionally, there are several government programs designed to assist business
owners with securing a business loan.

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Production Plans

Overdraft

An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn upon at
any time and is ideal for your day-to-day expenses, particularly to see you through cash flow problems.

It is worth noting that loans are probably more appropriate for long-term funding. An overdraft is likely to cost
more than a loan for a long-term purchase.

Advantages

• An overdraft is flexible - you borrow what you need at the time which may make it cheaper than a loan.
• You only pay for the funds you use.
• It's quick to arrange.
• There is not normally a charge for paying off the overdraft earlier than expected.

Disadvantages

• If you have to extend your overdraft, you usually have to pay an arrangement fee.
• Your bank could charge you if you exceed your overdraft limit without authorisation.
• The bank has the right to ask for repayment of your overdraft amount at any time.
• Overdrafts may be secured against business assets - the lender can take control of these if you don't
repay the overdraft.
• Unlike loans you can only get an overdraft from the bank where you maintain your current account. In
order to get an overdraft elsewhere you need to transfer your business bank account.
• The interest rate applied is nearly always variable, making it difficult to accurately calculate your
borrowing costs.

Credit Cards

A small business credit card will provide the necessary support for the outgoings of your company. It is a fact of
life that sometimes your outgoings will exceed immediate available funds, so it is a good idea to be prepared for
this event. UK Credit cards for small businesses come with protection from fraud, so you will not be charged for
improper use – as long as the issuer is notified of the theft quickly.

The potential benefits of having a small business credit card are considerable; it can help with various areas of
running your business, from booking travel arrangements to paying for advance mass shipments of products
from wholesalers. Credit cards for small businesses can also prove to be invaluable when unexpected
investment opportunities arise and you need fast access to funds. Not all, but some banks require you to have a
current account open with them before you can be eligible for a small business credit card.

One of the great things about small business credit cards is that it is fairly easy to add supplementary card
holders to your business account. This can be very useful in minimising the to-and-froing of money within the
business, but some banks charge for the privilege so check this first if you think it will become necessary.

Giving other members of staff access to your small business account can significantly reduce the amount of time
spent interpreting where the money has been spent. Many issuers put the infrastructure in place to allow you to
manage and track such activity and the benefits of this service will increase as your small business expands.
This does not diminish the control you have over the funds of your business as you can allocate spending limits
to card holder’s individually, and track their expenditure in detail.

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Discounts and Rewards

By taking out a small business credit card; your company will benefit from similar treatment as some of the
longer-established businesses in operation. By using your small business credit card you can expect to receive
discounts off certain products and services as well as cover for all account card holders for things like travel
insurance. Check individual issuers for specific details.

Some credit cards for small businesses have a system in place which rewards you according to how much you
spend on the account. This is particularly beneficial if every card holder is included on the programme. Further
features can include deals with telecom companies for every member of staff, in order that they can keep in
touch in a more cost-effective manner.

Charge Cards

Charge cards are an appealing option as you can often get up to 2 months of interest free credit-card purchases
if you keep up to date with payments. A charge card also doesn’t have a pre-set limit on spending, allowing your
business the flexibility it might need.

Retained Profit

Retained profits are when a business makes a profit and it does

not spend it, it keeps it - and accountants call profits that are kept
and not spent retained profits. That's all.

The retained profit is then available to use within the business to

help with buying new machinery, vehicles, computers and so on
or developing the business in any other way. Retained profits are
also kept if the owners think that they may have difficulties in the
future so they save them for a rainy day!

Trade Credit

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to
you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other
valuables without paying cash on the spot, you're using trade credit.

When you're first starting your business, however, suppliers most likely aren't going to offer you trade credit.
They're going to want to make every order c.o.d. (cash or check on delivery) or paid by credit card in advance
until you've established that you can pay your bills on time. While this is a fairly normal practice, you can still try
and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly
prepared financial plan.

When you visit your supplier to set up your order during your start-up period, ask to speak directly to the owner of
the business if it's a small company. If it's a larger business, ask to speak to the CFO or any other person who
approves credit. Introduce yourself. Show the officer the financial plan you've prepared. Tell the owner or
financial officer about your business, and explain that you need to get your first orders on credit in order to launch
your venture.

Depending on the terms available from your suppliers, the cost of trade credit can be quite high. For example,
assume you make a purchase from a supplier who decides to extend credit to you. The terms the supplier offers
you are two-percent cash discount with 10 days and a net date of 30 days. Essentially, the supplier is saying that

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if you pay within 10 days, the purchase price will be discounted by two percent. On the other hand, by forfeiting
the two-percent discount, you're able to use your money for 20 more days. On an annualized basis, this is
actually costing you 36 percent of the total cost of the items you are purchasing from this supplier! (360 ( 20 days
= 18 times per year without discount; 18 ( 2 percent discount = 36 percent discount missed.)

Cash discounts aren't the only factor you have to consider in the equation. There are also late-payment or
delinquency penalties should you extend payment beyond the agreed-upon terms. These can usually run
between one and two percent on a monthly basis. If you miss your net payment date for an entire year, that can
cost you as much as 12 to 24 percent in penalty interest.

Effective use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of cash
discounts or the incurring of delinquency penalties. But every business should take full advantage of trade that is
available without additional cost in order to reduce its need for capital from other sources.

Factoring

Factoring is a flexible form of loan, which advances money to a company as it issues new invoices. This is
different to overdrafts or more formal loans, which are usually for a fixed amount.

There are two major advantages of factoring compared to overdrafts or other loans. Firstly, factoring is flexible in
that the amount a company can borrow grows with sales. This is often essential to enable companies to fund that
growth, since they must usually pay for supplies before they receive payment from customers. The second
advantage factoring offers is that no other assets are needed to secure the funding.

How does it work?

A factoring company will lend a company a certain percentage of each invoice that it issues; it will then collect the
invoice when it becomes due and pay the balance back to the issuing company. The factoring company charges
a fee, usually a very small percentage of the value of each invoice, and interest on the amount of money
borrowed.

A company must notify all its customers of the new arrangement, and hand over the task of collecting debts to the
factoring company. Often at the start of a new factoring relationship, the factor will take on existing debtors, which
can involve a very substantial payment being made right at the start.

Setting up a factoring deal can be done far more quickly than most other forms of finance.The staff at factoring
companies are often more commercial than at some other lending institutions, and will work hard to help find a
solution for potential client companies.

What about bad debts?

Even though some factors technically buy the invoices from a company, their contracts are very specific that if an
invoice is not paid within a certain time period (usually 90 days) the factor will reclaim any advances it has made
against the invoice.

However most factors will offer a “without recourse” service where the debts are insured. This costs quite a bit
extra but can be worthwhile. Typically insurance will cover 80% of a debt rather than the whole thing, but when a
customer goes bust, getting 80% feels far better than getting nothing at all!

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 Task 2 - Examine the factors influencing the decision-making process
during financial planning

Decision Tree

A way to look at all the factors influencing a decision within business would be too draw a decision tree.

• Planning Tool • Disadvantages

o Applies logic to decision o Reliant on the accuracy of the data used
making o Requires qualitative input to give complete
o Identifies likely outcomes picture
o Quantitative decision making o Probabilities only estimated

o Real time data problems

• Advantages • Process
o Useful for operational decision o The Decision
making o The Alternative
o Enables effective use of back
o Estimates of financial cost and benefits
data
o Identify probability of outcomes
o Use of probability allows
o Squares - where decisions have to be
flexibility
made
o Scientific/objective analysis to
o Expected Value - Financial outcome of a
decision making
decision
o Encourages clear thinking and
o Do Nothing is an option!
planning

• Decision trees Enable a business to quantify decision making

• Useful when the outcomes are uncertain
• Places a numerical value on likely or potential outcomes
• Allows comparison of different possible decisions to be made

Limitations:

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 • How accurate is the data used in • Data may be historical – does this data relate to real
the construction of the tree? time?

• How reliable are the estimates of • Necessity of factoring in the qualitative factors –
the probabilities? human resources, motivation, reaction, relations with
suppliers and other stakeholders

Business Analysis

Data

• Purpose:
– Identify where the business stands in relation to rivals, etc.
– Collect and use data to inform business decision making
– Identify strengths and weaknesses in the business
– Use information to inform strategic planning

Method:

• Collection of data from a range of sources:

• Market research
• Past sales data
• Market growth data
• Specialist analyst data
• Secondary data, e.g. Mintel

You would then collect this data and analysis it using some or all of the following techniques:

Analysis
Trends Averages Variance

• Looking for patterns in • Averages are a measure • Averages have limitations –

data collections
• Frequency and reliability
of trends
• Impact of external
factors, e.g. seasonal
variation, random events,
cyclical trends
Correlation
of central tendency – measures of data spread used to
the most likely or assess width
common item in a data • Range – difference between
series the highest and the lowest value
• Calculated through 3
measures: • Standard Deviation – used to
– Mean measure the variance of the data
– Median set from the mean – can highlight
how reliable the mean is as being
– Mode representative of the data set
Time Series Analysis

• The degree to which • Used to analyse

there is movements
a relationship between of a variable over a time
two period – usually years,
or more random quarters, months, etc.

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 • Importance of assessing
variables the:
• The closer the – Trend
relationship the higher – Seasonality
the degree of correlation – Key moments
• Perfect correlation would – Magnitude
be
where r = 1

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Forecasting

• Focus groups - a group of individuals selected and assembled

by researchers to discuss and comment on, from personal experience, a topic, issue or
product
• User groups – similar to focus groups but consisting of those
who have experience in the use of a product, system, service, etc.
• Panel surveys – repeated measurements from the same sample
of people over a period of time
• Delphi method – calls on the expertise and insights of a panel of experts to help with
forecasting – seen as being more reliable than data analysis only
– Could be drawn together from around the world as there is no need to have people
together at the same time
• In-house judgements – Use the expertise and judgements of those involved in the
business in aiding and making judgements

Advantages and disadvantages:

• Data from several years can give accurate guides to future performance
• Statistical techniques can make
the data informative and useful
• All depends on the quality of the data and the accuracy of the techniques used to analyse
the data

Investment Appraisal

• A means of assessing whether an investment project is worthwhile or not

• Investment project could be the purchase of a new PC for a small firm, a new piece of
equipment in a manufacturing plant, a whole new factory, etc
• Used in both public and private sector

Types of investment appraisal:

 • Payback Period • Profitability Index
• Accounting Rate of Return (ARR)
• Net Present Value (discounted cash flow)
• Internal Rate of Return (IRR)

A fork lift may be an important item but what does it contribute to overall sales? How long and
how much work would it have to do to repay its initial cost?

Payback Period

• 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.

Accounting Rate of Return

A comparison of the profit generated by the investment with the cost of the investment.

Average annual return or annual profit

ARR =
Initial cos t of investment

For example:

• An investment is expected to yield cash flows of £10,000 annually for the next 5 years
• The initial cost of the investment is £20,000
• Total profit therefore is: £30,000
• Annual profit = £30,000 / 5 = £6,000
• ARR = 6,000/20,000 x 100 = 30%

Net Present Value

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 • Takes into account the fact that money values change with time
• How much would you need to invest today to earn x amount in x years time?
• Value of money is affected by interest rates
• NPV helps to take these factors into consideration
• Shows you what your investment would have earned in an alternative investment regime

For example:

• Project A costs £1,000,000

• After 5 years the cash returns = £100,000 (10%)
• If you had invested the £1 million into a bank offering interest at 12% the returns would be
greater
• You might be better off re-considering your investment!

Internal Rate of Return

• Allows the risk associated with an investment project to be assessed

• The IRR is the rate of interest (or discount rate) that makes the net present value
= to zero
– Helps measure the worth of an investment
– Allows the firm to assess whether an investment in the machine, etc. would yield a
better return based on internal standards of return
– Allows comparison of projects with different initial outlays
– Set the cash flows to different discount rates
– Software or simple graphing allows the IRR to be found

Qualitative Factors

• Other factors need to be taken into account, particularly the effects of decisions on
stakeholder groups and their response to such decisions, e.g.
– The takeover of Manchester United by Malcolm Glazer might make financial sense
but the reaction of the supporters might make the move unworkable

• Qualitative factors look to take account of these other issues that may influence the
outcome of a decision
• Can be wide ranging and especially need to consider the impact on human resources and
their response to decisions

SWOT Analysis

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 • A decisions (for example, investment in a new production plant) could be considered not
only in financial terms but also to apply other techniques of decision making to look at wider
issues:
• A SWOT analysis might be part of this:
– Strengths
– Weaknesses
– Opportunities
– Threats

PEST Analysis

• Might also need to factor in other external issues that might influence the decision making
process which can be summarised as:
– Political
– Economic
– Social
– Technological
• Political could be in its widest sense, e.g. the internal politics of a firm as well as the national
and international political effect

For example:

• The decision to site a series of wind turbines in a coastal area might be justified on financial
grounds but:
– What is the reaction of the local community?
– Does government policy support such planning developments?
– Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?
• Such factors may make the difference between success and failure

Stakeholder Analysis

• Wider impacts on stakeholder groups may also be necessary, such stakeholders include:
– Employees
– Shareholders
– Managers
– Environment
– Local Community
– Suppliers
– Government
– Consumers

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 Task 3 – Apply standard costing techniques and analyse deviation from
planned outcomes

You are planning to spend money to get your project to work and there will be a
requirement on you to establish your BUDGET for your project.

Now! A budget is a guestimate of what you will need to spend and in a lot of
cases the proposed budget will be exceeded.

As part of this task you must, after you have established your budget tell your MD
(me) the areas that are likely to be exceeded and why.

------------------------------------------------------------------------------------------------------------------------------------

The act of budgeting for your business forces you to think through all the important numbers and to
develop a picture of what your business is going to look like in three, six, nine and 12 months. A
budget is a powerful business tool that will help make better decisions. It enables you to develop
and maintain a thorough understanding of the internal financial workings of your business.

The ability to set financial goals for sales, expenses and profits is a true measure of the businesses
ability to succeed.

The purpose of a budget is to give a visual description of the expected financial results of your
business activities. When preparing a budget, remember that:

• It should cover 12 to 24 months of business operation.

• You should work out a complete budget before beginning business operations.

• Each month, you should review, revise and update your budgets for the next 12 months.

A basic business budget contains four major numbers: projected sales and revenue; projected total
costs of achieving that level of sales and revenue; the profit or loss from operations based on the
two numbers above; and the cumulative total of profits and losses over time.

The first and most important number is the top line-the estimated sales for the month. This number
should be the result of a complete analysis of marketing and sales activities. Make sure this figure
contains high, medium and low sales estimates. The sales and revenue projections should be based
on experience, market analysis and research. However, it's worth nothing that the business should
still be profitable even if the low sales estimate turns out to be correct.

The next part of a budget should include all the costs of operation involved in producing and
delivering the product or service to customers. These include:

• The costs of purchasing or producing the product or service.

• Sales and marketing costs.

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 • Your business's administration and operation costs.

• All fixed, variable and semi-variable costs of business operation.

Your final number should include 100 percent of all out-of-pocket expenses necessary to achieve
your estimated sales revenues.

The next part of your budget is the total profit or loss from operations for that month. There will
sometimes be months of the year where your business loses money. In a new business startup, the
first few months will usually show losses. The general sales and profit trends are most important.

Lastly, your budget should reflect the cumulative profits or losses of the company over a period of
months. Profits and losses are added together each month to get a total; these totals tell you when
your business will break even and begin earning a profit. The total of losses will tell you how much
money you will have to borrow or provide to the business before it is profitable. An accurate budget
should reveal the truth about ther businesses potential.

Each major number in your budget should be reviewed each month. You should compare the actual
results in each category against the projected results. The act of studying each number each month
will improve performance in that area.

Areas of a Budget

Rent

A payment made by a tenant at intervals in order to occupy a property or a similar payment

for the use of equipment or a service.

Generally rent will be a fixed price but it may need to deviate from the planned outcomes
for such reasons as: a need to expand, you could get half way through the year after
introducing your product and it could turn into a huge success and you may need to expand
your plant to cope with rising demand for your product. If this is the case then ideally profits
from the extra units being sold will cover the cost for the extra rent.

Rates

Rates are costs such as electricity, gas, water etc.

These costs are also counted as “fixed costs” normally but as I said above in respect to rent
there could be an increase in demand for your product which will require more work and you
will need your electricity, water, gas etc. to run the extra buildings required to increase
output.

Salaries

A salary is a form of periodic payment from an employer to an employee, which may be

specified in an employment contract. It is contrasted with piece wages, where each job, hour
or other unit is paid separately, rather than on a periodic basis.

As long as you keep the same amount of employee’s in your business you will know the
salaries are going to stay the same. The only thing to watch out for here is annual inflation
increases and possible pay strikes.

You may also need to hire extra workers to cope with extra demand. Or make workers
redundant if sales are low.

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Raw Materials

A raw material is something that is acted upon or used by or by human labour or industry, for use
as a building material to create some product or structure. Often the term is used to denote
material that came from nature and is in an unprocessed or minimally processed state. Iron ore,
logs, and crude oil, would be examples.

Raw material costs will change as demand changes. Although with increased demand you may be
able to benefit from economies of scale and buy your material for a discounted bulk price.

Delivery Costs

This is the amount of money it will take to get the product from the factory to the suppliers, this will
depend on where the suppliers are, the amount you are transporting and also external factors like
fuel prices.

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References

Books

Tooley & Dingle HNC Engineering

Internet Pages

http://highered.mcgraw-hill.com/sites/0072467665/student_view0/chapter30/ - Short Term Planning

http://www.startups.co.uk/6678842908316653519/what-are-business-angels.html - Business Angels

http://www.glitec.co.uk/business-loans/ - Business Loans

BusinessLink.gov.uk – Various Research Information

www.entrepreneur.com

www.startups.co.uk

http://www.bized.co.uk/learn/business/strategy/decision/index.htm

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