The financial needs of a business will be determined by:

• the size of the business

• the current phase of the business cycle

• future plans for growth and development

• capacity to source finance — debt and/or equity

• management skills for assessing financial needs and planning

The form and content of the financial information in business plans vary but include some or all of the following:

• income statement

• cash flow statement

• balance sheet

• cost-volume-profit analysis

• financial ratios.

Budgets provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose.

Why are budgets needed?

• cash required for planned outlays for a particular period

• the cost of capital expenditure and associated expenses against earning capacity

• estimated use and cost of raw materials or inventory

• number and cost of labour hours required for production

Budgets provide the facts and figures for planning and decision making, and enable constant monitoring of progress and problem areas. They signal where things are not going according to plan so that adjustments can be made, and show where achievement towards objectives has occurred.

Examples

Financial risk is the risk to a business of being unable to cover its financial obligations. If the business is unable to meet its financial obligations, bankruptcy will result.

In assessing financial risk for a business, consideration must be given to:

• the amount of the business’s borrowings

• when borrowings are due to be repaid

• interest rates

• the required level of current assets needed to finance operations.

Examples

• Should the business borrow to expand its operations?

• Will shareholders/owners be prepared to contribute to the business or will expansion be financed through borrowings?

• Should the business use its excess funds to purchase assets or invest on the short-term money market?

• Will interest rates go up?

• What about changing exchange rates?

Financial controls are the policies and procedures that ensure that the plans of a business will be achieved in the most efficient way. Control is particularly important in assets such as accounts receivable, inventory and cash.

Examples

• Clear authorisation and responsibility for tasks in the business

• Separation of duties — for example, one person is responsible for ordering and another for receiving inventories; one person writes the cheques and another signs the cheques

• Rotation of duties — for example, staff are skilled in a number of areas and can rotate duties

• Control of cash, such as the use of cash registers, cash banked daily, no money kept on premises overnight, payments made by cheque not cash

• Protection of assets — for example, buildings are kept locked, a registry of assets is maintained, regular checks of inventory are carried out and security surveillance systems are installed

• Control of credit procedures, such as following up overdue accounts and customer credit checks.