Business Arithmetic

The movement of the money out of the business is referred to as Cash outflow

Re-order point refers to the point at which the order need to be placed, by making a guess of the demand in the future.
It takes into account

1. Lead time
2. Demand during lead time.

Cash Flow Projection deals with how the cash is supposed to flow into and out of the business. It helps the entrepreneurs to know when to pump in additional investment or when to put the surplus cash into investments. It is part of the business plan and helps to quickly get the amount of capital investment required by the business to be setup.

Operating Cycle (also referred to as CCC or Cash Conversion Cycle) is the amount of time lapsed from the point when the business has

1. purchased the raw materials/inventory
2. And the cash is received from accounts receivable.

CCC indicates the number of days for which the cash is held up in the business operations.

It is Pareto’s law that formed the basis for the technique ABC Analysis

ABC analysis is an inventory control technique derived from Pareto principle.
As per this an business unit analyzes its inventory and classifies them into three categories. The categorization is not a standard one and varies from one company to the other. From the perspective of inventory it refers to arriving at relative ratio of the quantity of stock and monetary value of the purchased/consumed stock.

1. A – Items that need to be tightly controlled and are of outstanding importance. It closely monitor the stock and maintenance the inventory based on the future demand estimates, to ensure that the inventory never runs out and at the same time ensure that the order is not too much so as to cause the inventory obsolete. class A items account for 10 to 20% of the items and contribute 70 to 80% of the consumption of items.
2. B – Items whose stock need to be monitored closely. As these items are of average importance, the company orders them less often. class B items account for 15 to 25% of the items and contribute 10 to 20% of the consumption of items.
3. C – Least expensive items and are of relatively low importance. These items are ordered in bulk loosely controlled. However, the monitoring strategy is in such a way that the company never run out of stock of these items. class C items account for 65 to 75% of the items and contribute 5 to 10% of the consumption of items.

Cash Flow Projection	Cash Flow Statement
It shows the cash that is predicted to be generated or expended in a given time-frame.	It shows how the cash is flowing into and out of the business.
It is anticipation of future.	It is a record of the past events
It is a very important management tool for successfully running the business.	It is not a management tool and can not manage the daily requirements. It is similar to the Balance Sheet or Income Statement.

Financial management is the application of general management principles to manage the financial resources of the business. It includes

1. controlling
2. directing
3. planning
4. organizing

the financial activities. For instance it deals with the financial activities like

1. procurement of funds
2. expending the funds

etc. It deals with the procurement, allocation and control of the financial resources of an enterprise.

The primary objective of financial management is to ensure maximum returns for the shareholder’s investments. So, it deals with the objectives

1. To ensure continuous and substantial inflow of funds to the concern.
2. To ensure that sufficient returns are returned to the shareholders.
3. Optimum utilization of the funds through their utilization in maximum effective way and with least cost..

The following are the three elements that play key role in the process of financial management.

1. Financial Planning: Financial planning makes sure that the funding is available to the business at all times needed.
   1. Funding is needed in the short term to invest in stocks and equipment, fund the credit sales, salaries and wages.
   2. Funding is needed in the long term expand the business operations and fund the acquisitions.
2. Financial control: Financial control is a key element that help the business to meet the objectives. It deals with
   1. efficient utilization of the assets
   2. securing the business asets
   3. management acting in accordance with the best interest of the shareholders and in compliance with the business rules.
3. Financial decision making: This key element deals with the investment, financing and dividends.
   1. Investments must be financed in one way or the other. However the business should also consider raising finance through alternate business alternatives like borrowing from banks, sale of new shares or getting the materials or goods from suppliers on credit.
   2. When the business earns profits, financial decision should be taken to ensure that the profits should be re-invested into the business or it should be distributed to shareholders through dividends.
   3. Dividends should be optimally decided. If they’re high, then the business will run into lack of funds and may not be able to reinvest to grow the revenues and to earn more profits.

The following aspects are given due consideration during financial decision making.

1. Investments must be financed in one way or the other. However the business should also consider raising finance through alternate business alternatives like borrowing from banks, sale of new shares or getting the materials or goods from suppliers on credit.
2. When the business earns profits, financial decision should be taken to ensure that the profits should be re-invested into the business or it should be distributed to shareholders through dividends.
3. Dividends should be optimally decided. If they’re high, then the business will run into lack of funds and may not be able to reinvest to grow the revenues and to earn more profits.

The term budget is synonymous to the “allocation of resources”. Budget is defined as the quantitative expression of a plan for a given period of time, for a given business. Few aspects the budget covers are

1. Costs and expenses
2. Sales volumes and revenues
3. Resource quantities

etc.

The essentials of budget include

1. For accountability
2. To control the resources
3. To communicate the plans to corresponding managers who are responsible for.
4. To encourage managers to put their best efforts to reach the budget goals.
5. To evaluate the performance of managers

Inventory control is a system that enables the businesses to control the inventory of items so that they are never out of stock, while ensuring that the cost of maintaining the inventory is lowest. In other-words inventory control is a system that ensures that the items are always in stock while consuming lowest possible cost.

The inventory control systems serves the following objectives.

1. Ensure that there is no out of stock scenario.
2. Maintain optimum levels of inventory te eliminate excessive costs.
3. To facilitate scientific basis so as to plan the inventory requirements.
4. Maintain safety stock levels to compensate the fluctuations in demand for the product.
5. Maintain optimum levels of inventory so that the deterioration and obsolescence are least.
6. Maintain proper records of the inventory so as to safeguard against stealing, loss due to leakage or pests and also to ensure that the stock is ordered to replenish it in the right time.

Budgeting is followed in the large corporations collectively by various department in the organization. These departments prepare their plan keeping them in alignment with the organization goals, which are set by the top management team in the organization. Each department prepares these plans so that they help the organization realize the goal. Managers from each of these departments come up with the various allocations for

1. Capital requirements
2. projections of sales
3. operating costs
4. Overhead costs

etc. Considering these elements, the operating profits and the returns on the investment they want to use are computed.

Budget will project all these values over the next fiscal/financial or calendar year. During this process,

1. each department prepares its plans and the estimated budget.
2. These budget plans are then presented to the upper management.
3. The upper management will then negotiate and propose the required changes in the budget allocation.

The budget planning document contains

1. Description of the details
2. Documentation
3. Reasons justifying the numbers quoted.

The road-map for the operations over the upcoming year depend solely on the approved budget. In an ideal scenario, there should be monthly or quarterly budget reviews to monitor the effective utilization of the budget. During these reviews, the deviation between the allocated budget and actual budget spending is tracked and if required additional budget might be approved. The performance of the managers usually is decided by how effectively they justify the budget allocated to them.

As provided below, there are different budget types that help different business units to estimate their budgeting needs.

1. Capital Budget: The capital budget is used to determine whether the long term investments on various elements specified below are worthy or not.
   1. New Machines
   2. New Plants
   3. New Products
   4. Replacement machinery
   5. Research projects

   etc

2. Cash flow/Cash budget: This budget deals with the estimation of future expenditures and future cash receipts over a given period of time. This is usually done for short terms. This type of budget helps the business to know when the income can meet the expenses or when the outside financing will be required.
3. Marketing budget: A estimate of the budget associated with the
   1. Advertising
   2. Promotion
   3. Public relations

   so as to market the product or service.

4. Production Budget: It deals with the estimation of the number of finished products to be produced so as to meet the sales targets. It also covers the other costs like labor, material etc which are associated with the manufacturing of the finished goods.
5. Project Budget: An estimate of the cost to complete a project in a company. It considers the costs associated with labour, materials and other related expenses. It usually splits the entire project into individual specific taks. Each of these tasks is allocated with a budget. To arrive at the project budget, the cost estimate is used.
6. Sales budget: An estimate of the future sales. These sales are usually broken down into both currency as well as units. Usually used to establish the sales goals for the business.

The most widely used forms of the budgeting process are

1. Traditional budgeting: In this form of budgeting the historical performance of the budgeting process is evaluated. After the review the budget is projected based on this information after introducing the appropriate changes. In the event where in the inflation is high, the cost variations over the past several years are projected in place. In such cases the adjustments are made for
   1. inflation
   2. projected growth or decline in business activities.

   In this case, the historical sales patterns are projected using the trend followed in the sales growth. In case new products are introduced, the new sales are then included.

2. Zero-based budgeting: While following this strategy to create the budget, the budget is prepared right from scratch without any consideration to the historical information. When this form of budgeting is followed, each and every expenditure as well as income is documented and justified.

Working capital is defined as the amount of money required to fund the day to day routine operations of a business.
Working capital is required, especially during the start-up period, to pay for the expenses and debts as and when they arise. It is more significant during the start up period because the business will not yet be ready to make profits (it takes some time for the business to start earning profits, not on the first day) and the break even point is not yet reached.

The businesses need a working capital for

1. For procuring the fixed assets or long term assets. Assets like
   1. Building
   2. Equipment
   3. Land
   4. Machinery

   etc are long term assets and will last for a longer period of time. Once procured, these assets are put to operation either for production or sales or service. It should be noted that these long term assets are not sold or traded. So, the investment on these assets does not result in cash inflow for the business.

2. For purchasing the
   1. insurance premium
   2. packaging material
   3. raw materials
   4. rent on land or building
   5. paying utility bills
   6. salaries
   7. wages

   and for many other expenses. Thus this is the money needed for carrying out the day to day operations of the business.

Assets		Liabilities
Stock	25,000	Trade Creditors	16,000
Debtors	37,500	Dividend payable	25,000
Cash	50,000	Tax	22,000
Short term investments	38,000	Short term loan	30,500
Total	1,50,500	Total	93,500

Gross working capital = 1,50,000
Net Working capital = Total Assets – Total Liabilities = 150,500 – 93,500 = 57,000

The working capital of a mobile phone accessories business is as follows.

1. Assets:
   1. Stocks
   2. Cash
   3. Debtors
   4. Short term investments
2. Liabilities:
   1. Outstanding expenses
   2. Short term loans
   3. Trade creditors

---

You might also want to refer the following pages.

Books & Other Material

1. Entrepreneurial Opportunity
2. Entrepreneurial Planning
3. Enterprise Marketing
4. Enterprise Growth Strategies
5. ‎Resource Mobilization