Edexcel Business A Level Revision

Whilst budgets are widely used to in business, you should appreciate that they have some important limitations. In particular: Budgets are only as good as the data being used to create them . Inaccurate or unreasonable assumptions can quickly make a budget unrealistic Budgets can lead to inflexibility in decision-making Budgets need to be changed as circumstances change , for example sales figures can be affected by many variables in demand such as changes in tastes, the actions of a competitor and so on. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control. This has an associated OPPORTUNITY COST Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers Costs covere...

Historical figures - budget initially based on the figures from previous period (year) Extrapolation - means assuring that past trends will continue into the future. It must be used with care because changes in business conditions may require adjustments to be made. For an existing business it may be best to produce a budget based on previous figures, such as last year's sales and costs. This approach uses extrapolation to model the next year's targets As the product moves through its life cycle, it places different demands on budgets, for example less adverting may be needed. Allowances need to be made for inflation, to ensure estimates are correct Sales figures can be unpredictable  Costs may not be the same Economic variables such as the business cycle can affect budget figures Unforeseen events such as the euro crisis can affect budgets.  A historical budget is realistic in that it is based on actual results, HOWEVER, circumstances may have changed (e.g. new ...

Cash management - involves the construction of a cash budget Always necessary to hold some cash for transactions, precautionary reasons and for speculative purposes (awaiting a business opportunity) Cash flows should be monitored Excess cash should be profitably invested Provision of overdraft facilities should be negotiated in case of cash shortage. IMPROVING THE CASH POSITION 1) Short term ▪Reduce current assets (stock and debtors) ▪Increase current liabilities (delaying payments) ▪Sell surplus fixed assets 2) Long term ▪ Increase equity finance ▪ Increase long term liabilities ▪ Reduce net outflow on fixed assets SHOULD SELLING PRICES BE DISCOUNTED? Price discounting is designed to improve the cash flow into the business. It generates cash through increased sales. Also reduces stock levels. BUT... ▪It may undermine the firm's pricing structure ▪ It may leave the firm with low stocks ▪ It's success does depend o...