2.2 financial planning Flashcards
what is a variable cost ? example.
a cost that changes
e.g wages
what is a fixed cost ? example.
a cost that stays the same.
e.g a salary
what is contribution per unit?
the amount of revenue that contributes to covering a businesses fixed costs after the variable cost per unit has been taken away
contribution per unit formula.
selling price per item - variable cost per unit
what is total contribution?
the amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away
total contribution formula
Total revenue - total variable costs
revenue budget defintion
a revenue budget forecasts expected revenues for a business during a period
break even formula
fixed costs/contribution per unit
sales at break-even point formula
fixed costs/profit volume ratio
profit volume ratio formula
total contrubition/sales (x100)
name 3 disadvantages for budgets
- are only as good as the data being used
- can lead to inflexibility in decision -making
- time consuming and requires a lot of management
what are the 2 types of variances in budgeting ?
favourable variance - costs were lower than expected in the budget (good)
adverse variance - costs were higher than expected in the budget (bad)
name 2 purposes of budgeting
- motivates budget holders due to increased responsibility
-helps with planning and forecasting to make an informed decision
sales volume formula
sales revenue/price
operating profit margin formula
operating profit/sales revenue x100
Total costs formula
Total fixed costs + total variable costs
Sales forecast definition
A prediction of future sales within a business.
Sales revenue formula
Sales volume x price
Why might sales forecast be wrong ? (3)
-competitor behaviour changes
-new entrant into the market
-lack of information
Why might sales forecasts be more difficult for new businesses ?
Because of a lack of data or information
What is revenue ?
Revenue is the income earned by a business from the sale of its goods and services.
Revenue formula
Number of sales x sales price
What are costs ?
Costs are all the expenses that a business pays.
What is break-even analysis ?
The process of predicting the level of output at which total costs and total revenues will be the same.
Total contribution per unit formula
Total revenue per unit - total variable costs per unit
Expenditure budget definition
An expenditure budget is a budget that forecasts expected costs for a business during a period of time.
What is favourable variance ?
When the actual revenue is higher than the forecasted revenue
What is adverse revenue ?
When the actual revenue is lower than the forecasted revenue
Net cash-flow formula
Total cash inflow-total cash outflow
