2.2 Financial Planning

Question 1

common problems with cash flow forecasts?

Answer 1

• sales prove to be lower than expected
• customers do not pay on time
• costs prove higher than expected
• imprudent cost assumptions

Question 2

sales revenue/ turnover equation

Answer 2

selling price x units sold

Question 3

what are variable costs/direct costs

Answer 3

costs that change in direct proportion to output
e.g raw materials

Question 4

what are fixed costs/ indirect overheads

Answer 4

costs that do not vary with output in the short term
e.g. rent, insurance

Question 5

what are semi variable costs

Answer 5

costs composed of a mixture of both fixed and variable components

Question 6

profit equation

Answer 6

(total revenue) - (total costs)

Question 7

what is break even

Answer 7

the point where a business is not making a profit/loss
TR = TC

Question 8

what is contribution and its equation

Answer 8

contribution per unit is the difference between the selling price per unit and variable costs per unit
selling price - variable costs

Question 9

what is total contribution

Answer 9

difference between total sales and total variable costs

Question 10

equation for break even point

Answer 10

fixed costs/ contribution per unit

Question 11

margin of safety equation

Answer 11

actual sales - break even point

Question 12

difference between long run costs and short run costs

Answer 12

in LRC all the factors of production are variable whereas in SRC at least one factor of production is fixed

Question 13

Break even charts

Answer 13

An alternative to calculating break even via contribution is to plot the lines on a break even chart

Question 14

definition of profit

Answer 14

the reward or return for taking risks and making investments

Question 15

what is profit in absolute terms

Answer 15

the total value of profit earned (in £ value)
e.g. £50,000

Question 16

what is profit in relative terms?

Answer 16

profit earned as a proportion of sales achieved or investment made

Question 17

equation for gross profit

Answer 17

revenue - cost of sales

Question 18

equation fro gross profit margin

Answer 18

gross profit / sales revenue x100

Question 19

equatino for operating profit

Answer 19

gross profit - expenses & overheads

Question 20

operating profit margin

Answer 20

operating profit / sales revenue x100

Question 21

what is the profitability ratio?

Answer 21

assess the returns earned by a business from its trading activities and investments

Question 22

Net profit equation

Answer 22

Operating profit - (finance expenses - tax)

Question 23

Net profit margin equation

Answer 23

Net profit / sales revenue x 100

Question 24

What is a balance sheet/ statement of financial position?

Answer 24

Shows the financial position of a firm on a given day. What it owns (assets) and owes (liabilities). It’s a snapshot of the business and is used by investors to see if its worth investing in

Question 25

What are non-current assets?

Answer 25

Create revenue and allows them to make profits, like to be kept by the business for more than one year
E.g. vehicles, machinery

Question 26

What are current assets?

Answer 26

assets a business owns which are either cash, or will be turned to cash within a year.
E.g. inventories (stocks), receivables (debts)

Question 27

What are liabilities

Answer 27

Money a business owes
E.g. debt

Question 28

What are current liabilities

Answer 28

Debt the business will pay within a year
E.g. overdrafts, payable, tax

Question 29

What are non-current liabilities

Answer 29

Debts that the business has more than one year to repay
E.g. bank loan, mortgages

Question 30

Liquidity ratios definition

Answer 30

Assess whether a business has sufficient cash or cash equivalent current assets to be able to pay its debts as they fall due
(2dp)

Question 31

Current ratio equation

Answer 31

Current assets / current liabilities

Question 32

Current ratio results

Answer 32

• ratio of 1.5-2 suggests efficient magnament of working capital
• low ratio, below 1, indicates cash problems
• high ratio: too much working capital?

Question 33

What to look out for in current ratios

Answer 33

• industry forms (e.g. supermarkets operate with low current ratios because they are low debtors)
• tread (change in ratio) is perhaps most important

Question 34

The acid test ratios

Answer 34

(Current assets - stocks) / current liabilities

Question 35

Interpreting acid test ratio

Answer 35

• less than 1 is often bad news
• trend: significant deterioration in the ratio can indicate a liquidity problem.

Question 36

Definition of budgets

Answer 36

A plan that shows you how to spend your money monthly

Question 37

What is the purpose of a budget?

Answer 37

To create financial stability

Question 38

What information do firms use for setting budgets?

Answer 38

• Historical information
• Business plan
• Changes in operations

Question 39

What are the different types of budgets?

Answer 39

• Historical figure budgets
• Zero-based budgeting

Question 40

What is historical figure budgets?

Answer 40

Usually based on historical data (e.g. Sales and costs data from previous years.) and allow for factors, such as inflation and other relevant economic indicators.

Question 41

What is zero-based budgeting?

Answer 41

Some businesses make the decision not to allocate budgets on users zero budgeting approach. This is useful when is business needs to control costs closely zero budgeting requires all spending to be justified.

Question 42

What is an adverse variance?

Answer 42

When costs are higher/revenue is lower than the budget

Question 43

What is a favourable variance?

Answer 43

When the cost to produce something is less than the budgeted cost

Question 44

what is the equation for return on capital employed

Answer 44

operating profit / capital employer x 100