2.2 - financial planning

Question 1

define sales revenue

Answer 1

money coming into the business through sales

Question 2

how do you calculate sales revenue

Answer 2

price x quantity sold

Question 3

fixed costs vs variable costs

Answer 3

FC - costs that do not vary with the level of output or sales = paid even if the business produces no products

VC = vary depending on the level of production, lower when business is producing less

Question 4

how do you calculate total costs

Answer 4

fixed costs + variable costs

Question 5

define profit

Answer 5

• main objective of a business

- revenue minus costs

Question 6

what is break even

Answer 6

point at which the business makes neither a loss nor a profit

= fixed costs / selling price - variable costs

Question 7

what happens to beq if the price increases,, if there is a rise in variable costs or if there is a decrease in fixed costs

Answer 7

PRICE RISE

• beq increases
• business has to make more to break even
• tr curve becomes steeper

RISE IN VC

• beq increases
• buisness has to make more to breakeven
• tc curve becomes steeper

DECREASE FC

• beq decreases
• business makes less to breakeven
• tc curve falls horizontally

Question 8

what is the margin of safety

Answer 8

= amount of sales a business can lose before they make a financial loss

Question 9

what are some limitations of break even anaylsis

Answer 9

• assumes every item is sold
• business prices may differ depending on competition
• costs fluctuate
• only a prediction

Question 10

what is a sales forecast

Answer 10

A projection of acheiveable sales revenue based on data anaylsis trend, economic variables and competitor actions

Question 11

factors affecting sales forecasting

Answer 11

consumer trends
economic variables
actions of competitors

Question 12

difficulties of sales forecast

Answer 12

• historical data may not reflect future performance
• seasonality may affect sales
• natural disasters cannot be foreseen
• fluctuations in demand due to promotions, fashion, politics

Question 13

what is a budget

Answer 13

forecasting and planning as well as a motivational tool - based on income or expenditure

Question 14

what are the purpose of budgets

Answer 14

• agreed spending limit within the business
• based on objectives set within the organisation
• managers must think ahead and not just spend unlimited amounts of money in certain departments

Question 15

why would a business set a budget

Answer 15

• planning = anticipate problems and develop solutions before they arise
• motivation = managers to be in control of their own budgets providing them with responsibiltiy
• decisions = gives power to make financial decisions
• control = budgets are set against objectives and targets - tool to measure success

Question 16

historical figures budgets

Answer 16

• based on the last year of sales
• using current financial figures
• business is dynamic so figures may be wrong

Question 17

what are zero based budgets

Answer 17

• budget set for a business by using figures based on potential performance
• method takes away all historical assumtpions
• may be used with a start up
• justify levels of expenditure

Question 18

variance analysis

Answer 18

favourable variance = the manager has underspent in their department, regarded as a success as any costs cut will have an impact on profit

adverse / unfavourable variance = the manager has overspent and it would depend on reasoning if it were to be regarded as a success or not

Question 19

difficulties of budgeting

Answer 19

• often fixed for a year and can sometimes be inflexible
• tendency for managers to spend up to the limit
• time consuming to prepare
• unrealistic budgets can be demotivating
• interdepartment rivalry