Financial Planning
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Introduction
Financial Planning Businesses need to manage and measure their financial performance and check important indicators of their financial 'health'. It is vital that they know what their revenue and costs are if they want to see how much profit they are making. Businesses regularly measure their profit to monitor their progress. It is essential that businesses measure their profitability to see how much profit they are making and determine whether or not their business is successful. There is an essential distinction between profit and revenue; profit is not the same as revenue. Revenue is the amount of money a business receives from its sales however, the business has to deduct its own costs from the revenue and the sum that is left is actually the profit. If the business has costs which are greater than its turnover, instead of making a profit it will make a loss. Mostly all businesses exist to make a profit.. One of the ways businesses can improve their profits is by increasing their prices if the demand for their product is price inelastic, or even by reducing their prices to increase demand if the demand for their product is price elastic. During the first few months of trading, if I increase the prices of my cakes and charge relatively high prices, this will ...read more.
Middle
Liabilities Liabilities are things that businesses owe. There are two types of liabilities: current liability and long term liability. Current liabilities are short term debt for a business. They include an amount that can be paid off within a year. These liabilities may include overdraft repayments, wages, trade creditors, and expenses such as electricity/gas/water. Long term liabilities are the items that a business intends to keep for longer than a year. These liabilities do not require interest payments during the current year. They could include bank loan or mortgage. Expenses Business expenses are the cost of carrying on a business. Every business incurs expenses. These expenses might include: the rent of premises, utility, advertising costs, insurance, interest on loan, motor expenses and depreciation. These expenses are usually deductable and can reduce your tax liabilities. Cash flow Forecasts Cash flow forecasts are statements that show the amount of money that is predicted to come into and flow out of the business over a period of time. It is therefore useful for a business to make a cash flow forecast because it aids them in making decisions. However, cash flow forecast do have some weaknesses the main one being that they are not always accurate because they are based on assumptions. ...read more.
Conclusion
For example employees would be interested in the amount of profit the business is making, as an indicator of job security and potential pay rises. Shareholders would also want to know the business's operating profit because they would like to get as much dividend as possible. However profit and loss account can be manipulated to paint a better picture of the business which can be misleading. The financial data included is not adjusted for price changes, impact on the business's performance due to a change in the environment e.g. inflation. Profit and loss will be very useful to my business as it will enable me to pay the correct amount of tax. I can also compare my Profit and loss forecast with the actual performance of other companies- preferably a competitor, to see which aspect of my business needs to be considered more seriously. Balance Sheet The profit and loss account only shows part of the picture. It may show an excellent profit but at the same time, the company may have burdened itself with debt. The balance sheet shows the current health of the business as measured in terms of its assets and liabilities. A balance sheet shows how solvent the business is, and how liquid its assets are. It shows whether the business has the ability to meet its short term obligations, as well as paying all current and long term debts. ...read more.
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