This section is all about helping you memorize crucial information whilst you revise/study A Level Business Studies. Remember it, Test it!

REMEMBER IT!

• A budget is a financial plan for the future regarding the revenues and costs of a business.
• Budgetary control is the process through which financial control can be exercised throughout a business.
• Variances are discrepancies between the actual results and those budgeting.
• Budgetary control is where a business investigates any variances in order to find out why they occurred.
• A positive variance is where the money coming into the company is more than budgeted or where the money leaving the company is less than budgeted.
• A negative or adverse variance is where the money coming into the business is less than budgeted or where the money leaving the business is more than budgeted.
• Budgets can be created for a number of reasons.
• It’s important that good budgetary control is implemented in order for it to be successful.
• Zero budgeting is where a budget is set down to zero for a particular period of time.
• There are a number of limitations to budgets, however.
• Businesses need cash for set-up, day-to-day trading, and growth.
• The shorter the cash flow cycle, the lower the value of working capital that needs to be financed by other sources.
• Cash flow can be increased both for the short and long-term.
• profit = total revenue – total costs
• A business can increase its profit by increasing its total revenue or decreasing its total costs.
• gross profit margin = (gross profit / sales revenue) x 100
• net profit margin = (net profit / sales revenue) x 100
• return on capital = (net profit / capital invested) x 100
• There are a number of ways in which a business can increase its profit.

TEST IT!

1. Deborah is part of the accounting team in a recruitment agency. A major part of her role is concerns budgetary control. Last year she reported a positive variance.

a)
Explain what is meant by variance.
Why is it important for a business to keep a check on any variances that occur in a budget?

b) Give three reasons why budgetary control is important in order for a budget to be successful.

c) Deborah wants to suggest that they implement zero budgeting. Give two arguments she could use to make her case.

2. Thomas is manager of a restaurant and he also owns the property. Over the past six months his business has been experiencing a major cash flow problem. He has noticed that the profits have been low and feels that the decline in customers is due to the credit crunch. He’s also had to throw away a lot of excess stock.

a) Name three other main causes of cash flow problems.

b) Suggest two ways in which Thomas could increase his cash flow.

3. Graham owns a jewellery shop. Over the past year he has seen a decline in his profit margin.

a) Explain what is meant by a profit margin.

b) Profitability can be measured using the gross profit margin. Name two other ways in which profitability can be measured.

c) Describe three ways in which Graham can increase his profit in terms of his net profit margin.

ANSWERS

1.
a)

• A variance is a discrepancy between the actual results and those budgeted.
• In order to discover why they occurred and act accordingly in the future.

b) Answers include:

• To ensure that responsibilities are clearly defined.
• To ensure that budgets are being adhered to.
• So that actual performance can be monitored against the budget.
• So that corrective action can be taken if the actual results are very different from the budget,
• To ensure that variances are investigated into.
• So that any departures from the budget are approved first of all.

c) Answers include:

• Department managers have to justify any expenditures.
• The business can see where essential capital is required.
• It ensures minimal expenditure within the business.

2.

a) Answers include:

• Over-investments
• Over-trading
• Seasonal demands
• Unexpected changes (internal or external)

b) Answers include:

• Offer price discounts to his customers.
• Order less stock at one time.
• Consider a sale and leaseback on the property.
• Take out a bank loan or overdraft.

3.

a) The profit that’s made in proportion of sales revenue.
b) By the net profit margin and return on capital.
c) Answers include:

• Increasing sales without reducing the net profit margin.
• Increasing the net profit margin by reducing the variable cost per unit.
• Increasing the net profit margin by increasing the price.
• Increasing the net profit margin by reducing the fixed costs.

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