2.2 Financial Planning Flashcards
What’s the equation for revenue??
Selling price x no. of units sold
What’s the equation for average total cost??
Total cost/quantity
What’s the equation for contribution per unit??
Selling price per unit - variable cost per unit
What’s the equation for profit??
Total revenue - total cost
OR
Contribution - fixed costs
What’s the equation for contribution??
Total sales - Total variable costs
What’s the equation for B/E??
Fixed costs/contribution
What goes on the x-axis and y-axis of B/E graphs??
X-axis = Output (units)
Y-axis = Costs & revenue
What’s a limitation of B/E analysis??
Not realistic
What’s a budget??
Financial plan for the future concerning the revenues, costs & profits of a business
What are 3 uses of budgets??
- Establish priorities
- Assign responsibilities
- Monitor performance
What are the 3 main types of budgets??
- Revenue
- Cost
- Profit
What are the 2 main approaches to budgeting??
- Historical (using previous figures, realistic but doesn’t encourage efficiency & circumstances may have changed)
- Zero-based (Budgets set to zero, realistic but more time-consuming & complicated)
What are the 3 stages of constructing a profit budget??
- Analyse market
- Revenue budget
- Cost budget
What are 2 potential drawbacks to budgeting??
- Sales forecasting (is harder in dynamic markets and for start-up firms and hard to predict competitors)
- Costs (Unexpected costs likely, change with changes in external environment)
What are 3 limitations of budgeting??
- Lead to inflexible decision-making
- Need to be changed as circumstances change
- Time-consuming
What’s a variance??
Difference between actual performance and budgets
What are the 2 types of variance??
Positive (better than expected)
Adverse (Worse than expected)
What are 2 potential causes of positive variances and adverse variances??
Positive:
- Stronger demand than expected
- Better productivity expected
Adverse:
- Unbudgeted costs (from unexpected events)
- Over-spending
