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For any business, a budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, etc. 

Essentials of budget include: 

1. To control resources 

2. To communicate plans to various responsibility center managers. 

3. To motivate managers to strive to achieve budget goals. 

4. To evaluate the performance of managers. 5. For accountability.

1. Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. 

2. It is an activity which is concerned with acquisition and conservation of capital funds in meeting financial need an overall objectives of business organisation. 

3. It means applying general management principles to financial resources of the enterprise. 

The main objectives of financial management is wealth maximization of shareholder’s wealth. 

1. To ensure regular and adequate supply of funds to the concern. 

2. To ensure adequate returns to the shareholders. 

3. To ensure optimum funds utilization. 

Once the funds are procured, they should be utilized in maximum possible way at least cost.

In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy’s land was owned by 20% of the people. Pareto principle is a prediction that 80% of effects come from 20% of causes. The 80:20 ratio of cause-to-effect became known as the Pareto Principle. He became somewhat obsessed with this ratio, seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of his pea plants.

ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C): 

1. A being the most valuable items. 

2. B-items are the inter class items, with a medium consumption value. 

3. C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items).

The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: 

1. A-items are goods which annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.

 2. B-items are the inter class items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items. 

3. C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items. 

Through this categorization, the supply manager can identify inventory which is more important and more profitable, and separate them from the rest of the items, especially those that are numerous but not that profitable. 

Steps involved in ABC Analysis: 

1. Find out the unit cost and the usage of each material over a given period. 

2. For each item calculate the total cost = Annual demand x Item cost per unit 

3. Arrange all items in a progressively decreasing order of the cost (descending value). 

4. Calculate and tabulate the cumulative total cost. 

5. Calculate percentage on total inventory in value and in number. 

6. Compute the individual items as a percentage of the total number of items 

7. Tabulate.

ROE (Return On Equity) is a good indicator to know a true measure of how own money is being used.

Meaning: It is the ratio of net profit after interest and tax and owner’s investment. Significance: The significance of computing this ratio is to find out how efficiently the owners funds supplied by the shareholders/owners are being used. Example, if Sushmita the owner of a grocery shop has an equity stake of Rs 70,000 in the business, she has borrowed Rs 30,000 (rate of interest is 10%). 

This will attract an interest of 3,000 @ 10% per annum. 

If the Net Profit is Rs 14,000 then: 

ROE=Rs 14,000/Rs 70,000 x 100 =20%

The Unit Cost refers to the variable cost like raw-materials, packing material, sales commission, freight, etc.

Trading on equity relates to a situation when the debt component is likely to provide higher rate of return on share capital. Debt and equity are the two sources of finances. Both have their own merits and demerits.But when a mix of both is used wisely, the rate of return equity can increase. This is because the interest paid on the loan is deductible from earning before tax payment. The payment of dividend is only made after realizing the interest.

Production, marketing, and financing, deemed to be the most important factors for any business survival. ‘ Financing’ is considered to be the first because no entrepreneur can start and run the business without money. Among this the most critical element for success in business is ‘Finance’. 

Before doing anything, an entrepreneur should clearly answer the following three questions: 

1. How much money is required? 

2. Where will money come from? 

3. When does the money need to be available?

Cost of unit can be defined as the cost incurred by a company to produce, store and sell one unit of sale of a particular product or service.

Financial market is a market in which people and entities can trade financial securities (stocks and bonds), commodities (including precious metals or agricultural goods), and others like crude oil etc. at prices that reflect supply and demand. Market refers to the aggregate of possible buyers and sellers of a certain good or service and the transactions between them.

ICMA London defines a budget as “financial and quantitative statement, prepared and approved prior to a defined period of time, of the policy to be persued during that period for the purpose of attaining a given objective.” It may include income, expenditure and capital.

The chief cost of the budget process is time. In some corporations the process takes on a life of its own and becomes a convoluted exercise of excessive complexity which, moreover, prevents unit managers from doing any thinking: their time is consumed in efforts to comply with a vast array of requirements dictated from above. Much of the negative attitude that has developed concerning this activity has its roots in unnecessary bureaucratic impositions on the one hand and unreliability because of the rapid change, a few months out.

The business to break even when its value is equal to its total cost. The Break Even Point (B.E.P) is the sales volume at which there is neither profit nor loss, cost being equal to revenue. Break Even Point is a neutral point. Sales below this point show loss and sales excess of this point show profit. It is the relationship amongst cost of production, volume of production, profit and the sales value. 

The entrepreneur should know B.E.P as: 

1. He can forecast about profit accurately. 

2. He can ascertain costs, sales and profits at different levels of activity. 

3. For taking decision regarding price policy.

Following assumptions are made:

1. The proportion of sales mix must be predetermined.

2. The sales mix must not change within the relevant time period.

3. All cost can be categorized as variable or fixed.

4. Sales price per unit, variable cost per unit and total fixed cost are constant.

5. All units produced are sold.

Suppose a manufacturing unit produces three products A, B, and C. Then the following formula is used: Product A CM (contribution mix) per unit x Product a sales mix percentage + Product B CM per unit x Product B sales mix percentage + Product C CM per unit x Product C sales mix percentage = Weighted average unit contribution margin

Capital market consists of lenders and borrowers:

1. Lenders supply the funds

2. Investors demand the funds The demand for capital comes from:

1. Industrial Sector – It comes from the private sector into manufacturing or other economic activities.

2. Government

Sales mix is the proportion in which two or more products are sold. For the calculation of break even point for sales mix, 

following assumptions are made: 

1. The proportion of sales mix must be predetermined. 

2. The sales mix must not change within the relevant time period. 

3. All cost can be categorized as variable or fixed. 

4. Sales price per unit, variable cost per unit and total fixed cost are constant. 

5. All units produced are sold.

It is an average rate at which the inventory is drawn down over a period.

Internal sources of finance is referred to as owner’s own money. It is also known as owner’s equity. Particularly in the case of small entrepreneurs the owner’s money is very small.

Budgetary control is a technique of managerial control in which all operations are planned in advance. In the form of budget actual performance is compared with standard performance. 

It also helps to achieve the organizational objective of an enterprises. 

1. Provides a source of motivation to employees and employers. 

2. It helps in optimum utilization of resources. 

3. It also helps to maintain the coordination among all the departments.

Finance’ refers to funds or monetary resources needed by individuals, business houses and the government.

EOQ = √(2DP/C) 

where D = the annual usage (or demand) of the item in units 

P = the cost of place on order 

C = annual carrying cost per unit 

The above formula is based on following assumptions: 

1. Ordering cost is constant i.e. it is independent of size of the order. 

2. The cost of carrying the additional inventory is constant. 

3. There are no quantity and discounts available. 

4. The consumption is in a steady rate.

Inventory control is essential for an enterprise because: 

1. It ensures the availability of materials in the production process whenever it is needed. 

2. To ensure efficient and effective utilization of raw materials. 

3. It helps in removing all bottlenecks. 

4. To ensures prompt and regular delivery of materials to consumers. 

5. To examine quantity discount for large and lump sum order to stabilize the fluctuation of demand side.

The significance of finance in enterprise is elucidated like a lubricant to the process of production.

Financial management is needed because of the following: 

1. To protect against unforeseen circumstances: Entrepreneur minimizes the risks by making a estimate of risks. For this purpose, he prefers to manage his money (finance) by keeping in mind its requirement in the future. 

2. To maximise profit: By managing the finance effectively, the entrepreneur tries to maximize his profit. Finance like other resources is available in limited quantity. Efficient utilization of finance is the only way for profit maximization. 

3. To acquire assets: Any type of asset whether tangible or intangible, need finance for acquiring them. As the enterprise grows, develops or diversifies, the requirement of finance also increases. Thus more is the finance available, more are the chances of acquiring new assets. Moreover from the present income the provision is to make for meeting future obligations. This needs proper management of finance. 

4. To maximise wealth: As the profit increases the wealth of the entrepreneur and the enterprise both are maximized. Goal of wealth maximization is realized by entrepreneur by making optimum utilization of resources, by maintaining the faith of the shares, by properly utilizing the undistributed profit etc. 

5. To ensure ready availability of funds: The flow of funds must take place as and when needed. At any point of time the shortage of funds is undesirable for the growth of enterprise. 

6. Value points: 

(a) Proper utilization of time 

(b) Universal 

(c) Awareness of responsibility of others and employees 

(d) Sincerity (e) Team work and team spirit.

In many enterprises/organisations generally most of employees are honest and disapprove of theft, pilferage of materials and resources in many organisations. 

But every enterprise must keep some strategies for prevention of pilferage within your company could include: 

1. Install adequate inventory and control measures to account for all material, supplies and equipment. 

2. One control method is the requirement, register and signing for all tools and equipment to be issued by individuals. 

3. Identify all tools and equipment by some mark or code. 

4. Conduct a meeting in the form of workshop to convince and educate the employees that they have much more to lose than gain by stealing. 

5. Make them understand and realize all employees that pilferage is morally wrong no matter how insignificant the value of the item taken. 

6. Demand that supervisory personnel set a proper example and maintain a desirable moral climate for all employees. 

7. In extreme situations, propose spot searches of employees and vehicles leaving the installation at unannounced times and places. Publicize widely. 

8. Impress upon all employees that they have a responsibility to report any loss to proper authorities. 

9. Value Points: 

(a)Spirit of enquiry 

(b) Discipline 

(c) Sincerity 

(d) Unwillingness to hurt by employer 

(e) Duty and loyalty to duty.

Bar Codes and RFID (Radio Frequency Identification) tags are used in tracking containing electronically stored information.

Features of Co-operative societies: 

1. Democratic management: The management of a co-operative organisation is vested in the hands of the managing committee elected by the members on the basis of ’one member-one vote’. Democracy is, thus, the keynote of the management of a cooperative society. 

2. Capital and return thereon: The capital is procured from its members in the form of share capital. A member can subscribe subject to a maximum of 10% of the total share capital or Rs 1,000 whichever is higher. Shares cannot be transferred but surrendered to the organisation. The rate of dividends paid to the members/ shareholders is restricted to 9% as per the Co-operative Societies Act, 1912. 

3. Distribution of surplus: After giving dividends to the members, the surplus of profits, if any, is distributed among the members on the basis of goods purchased by each member from the society.

Excess of Unit Price over Unit Cost is known as the Unit Gross Profit or Unit Gross Margin. This represents the business’s profit from selling a product or providing service before deducting fixed expenses such as salaries, rent, and other expenses. 

Gross Profit = Unit Price — Unit Cost

Desirable behaviour of any inventory item is “Availability”. It means that there should never be any stock out. In other words, moment the need (demand) arises we should be able to supply the itemwithout losing any time.

Inventory means detailed list of items used in the business. It refers to stock of goods in the form of raw materials, work in progress and finished goods, a firm can make up the product and kept for sale in ordinary course of business. Thus, inventories make a linkage between production and sale of goods.

Yes, when an entrepreneur’s business is expanding, his business outflows can be more than his business inflows. It is so because there is always a lag between your spending (on raw materials, labour, etc.) and receiving the sales revenue. Receipt of sales revenue may be delayed because he might have given credit or you have produced ahead of the sales (to cater to the high demand during festive season) and are temporarily holding finished goods stock.

It is a level at which a new order must be placed so that the inventory is renewed before the stock reaches zero level. It is estimated by using the formula Reorder Point = Usage Rate x Lead Time 

Example: Suppose a company uses 15 units of an item per day (usage rate, and the order lead time is 10 days, a new order must be placed when the inventory level reaches 150 units (Reorder Point 150 = Usage Rate 15 x Lead Time 10) so that inventory is replenished before a stock out occurs.

1. Total Current Assets = Debtors + Stock + Cash + Short term investment 

Total Current Assets = (Rs 75000 + Rs 50,000 + Rs 1,00000 + Rs 76,000) 

Total Current Assets = Rs 3,01,000 

2. Total Current Liabilities = Sundry Creditors + Dividend Payable + Tax + Short Term loan) 

Total Current Liabilities = (Rs 32,000 + Rs 50,000 + Rs 44,000 + Rs 61,000) = Rs 1,87,000 

3. Gross Working Capital = Total Current Assets 

Gross Working Capital = Total Current Assets = Rs 3,01,000 

4. Net Working Capital = Total Current 

Assets – Total Current Liabilities 

Net Working Assets = Rs 3,01,000 – Rs 1,87,000 = Rs 1,14,000 

(a) Gross Working Capital = Rs 3,01,000 

(b) Net Working Assets = Rs 1,14,000

Gasoline, other combustible items, some hazardous chemicals, etc.

1. Cash and bank balances

2. Account receivables:

(a) Bills receivable, and

(b) Debtors

3. Short term investments/Temporary investment

4. Prepayment:

(a) Prepaid rent,

(b) Unexpired insurance, etc.

5. Accrued Income

In a factory manufacturing safety matches, phosphorous and potassium chlorate are not stored in the same or even adjoining areas, for fear of accidental mix up.

The length of time a product may be stored without becoming unsuitable for use or consumption. Items like vegetables, fruits, flowers and fish are perishable in nature. This calls for special storage conditions and equipments – cold storage, freezers, etc. These have financial implications. Similarly some of the manufactured food or medicinal products have expiry dates – beyond which they are not fit for consumption. This imposes certain constraints on inventory management.

Depreciation is applicable for tangible assets (Building, Machinery) and amortisation is available for intangible assets (Goodwill, Patent, Trademark). Depreciation may write off slow but amortisation may write off fast.

MRP is a short form of Maximum Retail Price. It is a price at which shopkeeper sells the goods to customers.

The cost is associated with the placement of an order for the acquisition of inventories.  It is determined on the basis of expenses incurred in the purchase department. Some of the components of cost are: 

1. Finding the sources of supply 

2. Obtaining quotations 

3. Transportation cost 

4. Expenses and follow up of an order (stationery, stamp) 

5. Forgone discounts 6. Loss of sales and customer goodwill.

It is defined as the cost of holding and handling materials inside or outside the stores. It is important to examine the inventory level and to maintain optimum balance of inventory.