2.2 - Financial Planning

Question 1

Break even formula

Answer 1

Fixed costs / selling price - variable costs (contribution)

Question 2

Total revenue fromula

Answer 2

Selling price x number of units sold

Question 3

Variable costs formula

Answer 3

Variable costs per unit x number of units sold

Question 4

Fixed costs…

Answer 4

Costs that stay the same no matter the output

Question 5

Break-even definition

Answer 5

When total costs exactly match the total revenue and the business is not making a profit or loss.

Question 6

Total contribution

Answer 6

The difference between total selling price and total variable costs.

Question 7

How do you read the break-even point on a break-even graph?

Answer 7

The break-even point is intersection between the total revenue line and the total costs line.

Question 8

What is margin of safety?

Answer 8

How much actual output is above the break-even level of output​.

Question 9

Margin of safety formula

Answer 9

Actual output level - break-even output level

Question 10

What are the needs of break-even?

Answer 10

1. Understanding the past - identifies price or cost issues.
2. Achieving future targets - how much they need to sell in order to cover costs or make profit.
3. Launching a new project- helps with decision making, e.g. introducing a new product to the market.
4. Starting a new business - is the business idea viable?
5. Business plans - break-even should be part of the business plan in order to apply for finance and support.

Question 11

What are the cons of break-even?

Answer 11

1. Based on predicted costs and revenue
2. Fixed costs can vary in reality, especially in the long term.
3. Ignores changes in variable costs or selling price as items are sold or bought in larger quantities.
4. Only indicates the number of sales needed does not ensure actual sales will materialise.

Question 12

What happens to break-even if costs rise?

Answer 12

Break-even will increase.

Question 13

What happens to break-even if costs fall?

Answer 13

Break-even will decrease.

Question 14

What happens to break-even if the selling price increases?

Answer 14

Break-even will decrease.

Question 15

What happens to break-even if the selling price decreases?

Answer 15

Break-even will increase.

Question 16

What is a budget?

Answer 16

A financial plan that shows:
- how much income is to be generated (sales)
- costs to be incurred (fixed and variable costs)
This is for a defined future period of time

Question 17

What is a historical budget?

Answer 17

Budgets that use last years figures as the basis for the current budget.

Question 18

What is a zero based budget?

Answer 18

This is when budgets and costs are set to zero.

Question 19

What are the advantages and disadvantages of historical budgets?

Answer 19

• realistic as it based on actual results
  BUT
• circumstances may have changed (e.g. new products, lost customers)
• doesn’t encourage efficiency

Question 20

What are the advantages and disadvantages of zero based budgets?

Answer 20

• more flexibility in response to changes in the market or economy
• forces managers to think and plan more carefully.
  BUT
• can be more expensive
• can be more time consuming

Question 21

What is variance?

Answer 21

The amount by which the actual result differs from the budgeted figures

Question 22

What is an adverse variance?

Answer 22

• A variance that reduces profit and increases costs
• budgeted income is lower than actual income

Question 23

What is a favourable variance?

Answer 23

• A variance that leads to higher than expected revenue and lower costs
• budgeted income is higher than actual income

Question 24

How do calculate variances?

Answer 24

Budgeted income - actual income

Question 25

What are some difficulties of budgeting?

Answer 25

• the budget may not allow for unexpected events
• can be time consuming to create
• can create conflict and competition between departments
• unrealistic targets may cause employees to become unmotivated and stressed

Question 26

What is sales forecasting?

Answer 26

A prediction of achievable sales revenue based on consumer trends, economic variables and competitor actions.

Question 27

What are consumer trends?

Answer 27

Habits or behaviours which consumers have towards the products they buy and the services they use

Question 28

What are economic variables?

Answer 28

Key indications in the economy e.g. inflation

Question 29

How may consumer trends affect sales forecasts?

Answer 29

• consumer trends have the ability to influence demand for products, therefore the level of sales businesses can expect to see in the future.
• demand in many markets changes as customer tastes and fashions change
• affects both overall market demand and market share of existing competitors

Question 30

How do economic variables affect sales forecasts?

Answer 30

• e.g. population, poverty rate, inflation, employment, exchange rates and tax
• for example, if the economy was in a recession,the demand for goods/services would fall due to the fall in consumer incomes which would lead to the business having to revise it sales forecast down

Question 31

How may the actions of competitors affect sales forecasts?

Answer 31

• competitors may make actions that are not anticipated which can affect sales forecasts
• for example, if a major competitor suddenly adopted a predatory pricing strategy then it is likely to result in a big fall in the demand for the businesses goods/services. As a result of this, sales forecasts may have to be revised down.

Question 32

What are some difficulties of sales forecasting?

Answer 32

• dynamic markets - markets that are rapidly changing are extremely hard to forecast for as they will have to keep being adjusted, making sales forecasts inaccurate
• start-up businesses - new businesses may find it difficult produce a sales forecast as they no previous sales data or experience of market conditions