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• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

4.1.1 Maximising profit

When we consider the finances of a business-oriented organization, the goal of maximizing profit is often put forward as the most attractive (what rational manager will argue about making the most profit possible?). This goal stresses the efficient use of financial resources, but it does not account for many real world complexities, such as uncertainty and the timing of returns or cash flows.

Uncertainty. Uncertainty or risk factors affect the viability of a project or investment alternative just as much as projected profits or returns. In reality projects have different risk characteristics and to ignore these can result in wrong decisions (HIH insurers is an example).

Example
Say a business is faced with two mutually exclusive investment projects (that is, only one may be chosen), of choosing between using a plastic or a stainless steel impellor for a bilge pump. If the element of risk is ignored the following profit outcomes are projected:

Outcome/risk	Projected profit	Projected profit
	Plastic	Stainless steel
Optimistic	$10,000	$20,000
Expected	$10,000	$10,000
Pessimistic	$10,000	0

 

The first project uses existing plant to produce the plastic impellors, a product with a stable demand. The second project uses the same plant to produce stainless steel impellors, which have a less stable demand. The second project may produce a profit that ranges between $20,000 and $0, depending upon market reaction. Which project should be chosen, and why?

If uncertainty/risk is ignored?

If uncertainty/risk is considered?

Timing. The second major objection to the profit maximization goal is that it ignores the time value of money.

Example
Use the same data given above, but assume that risk is not a factor. Even if we assume that both projects will earn $10,000, we still need to know when the profit will be realised. Assume that the plastic impellors can be produced immediately, but the stainless steel ones cannot be produced until the next year. Which project should be chosen, and why?

The year's delay in receiving the profits has a cost implication in investment opportunities forgone (an opportunity cost), such as interest on a deposit or a return on some other profitable venture.

The presence of inflation in the economy also means the monetary unit is devalued over time, thus receipts of the same amounts of currency at different times will represent differing buying power.

It appears that to formulate a better business objective, we must consider the effects of the comparative risk involved and the time effect on money as a store of value.

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