2.2 - Financial Planning & 2.3 - Managing Finance

Question 1

Time series analysis

Answer 1

A sales forecasting technique in which past annual sales figures arranged in chronoligical order (time series data) are extrapolated to predict future sales. Time series analysis can be used to predict and identify trends, seasonal fluctuations, cyclical fluctuations (with economic cycle) and random fluctuations.

Question 2

Uses of sales forcasting

Answer 2

• Inform cashflow forecasts to support financial management.
• Inventory managment and purchasing of raw materials - ordering well in advance can help build positive relationships with suppliers - bulk discount?
• Optimising capacity utilisation by managing staffing levels and macheniry to improve efficiency.

Question 3

Name 3 factors effecting sales forecasts

Answer 3

• Consumer trends: seasonal variations, fashion, LT trends
• Economic variables: interest rates, stage in economic cycle (GDP, unemployment), inflation, exchange rates
• Actions of competitors - pricing, promotion, product, place

Question 4

Define semi-variable cost and give examples

Answer 4

A cost comprised of both fixed and variable components.
Example: full time staff that also work overtime (semi-variable labour cost)

Question 5

Define short run and long run from a business context

Answer 5

Short run: the time period in which at least one factor of production is fixed
Long run: the time period where factors of production are variable.

Factors of production are land, labour, capital and enterprise.

Question 6

Define contribution and give formulas for unit and total contribution.

Answer 6

Contribution per unit is the amount of money each unit sold contributes towards paying fixed costs.
* Contribution per unit: selling price per unit - variable costs per unit
Total contribution can be calculated either by:
* Total revenue - total variable costs
* Unit contribution × number of units sold.

Question 7

Give the formula for profit that includes contribution

Answer 7

Profit = total contribution - fixed costs

Question 8

Define margin of safety

Answer 8

The range of output over which a profit is made.
The amount sales can fall before the BEP is reached.
Actual sales - break even sales
Can be expressed in pounds or units

Question 8

Give benefit of using break even analysis

Answer 8

Showing break even analysis on a business plan can help businesses to obtain finance.
Identify the likely influence to BEP of a change in a financial variable like costs or selling price.
Assist with setting sales targets

Question 9

Give limitations of break even analysis

Answer 9

• The BEP is a prediction based on potentially unreliable data. Doesn’t account for external factors like inflation which could alter costs and sales.
• Assumes all stock is sold - doesn’t account for buffer stock or falling demand for example
• Total revenue and total cost lines are not always linear (straight). For example, as output increases economies of scale reduced unit cost so revenue may increase to form a curved line.
• It is hard to accurately allocate fixed costs to business with multiple products (large product portfolio)
• Stepped fixed costs (e.g. increase in rent) make it difficult to use break even analysis

Question 10

Define two types of bugetting

Answer 10

• Zero-based bugets - a financial plan agreed in advance in which each cost must be justified ‘from scratch’ for each period
• Historical budgets - a financial plan agreed in advance which uses financial data from previos years as a template for the new budget. Adjustments can be made to account for expected changes in factors like inflation .ect

Question 11

Describe the contents of a statement of comprehensive income (Profit and loss account)

Answer 11

Includes the 3 types of profit (gross, operating and net) and a break down of the costs deducted from revenue to get to these profit figures. e.g. gross profit broken down into cost of sales and revenue. Allways shows figures for current and previous trading year. May include exceptional items - unexpected one-off costs.

Question 12

Distinguish between profit and cash

Answer 12

Cash is the money that flows in an out of a business in a specific period. However, profit is the money remaining once total costs have been deducted from total revenue.
There are different reasons why cash and profit are not the same such as:
* Sales from customers that pay on credit are considered profit, although the business has not yet received the cash.
* External finance like loans increases cash but is not considered revenue (or profit)
* The purchase of fixed assets is not treated as a cost in the profit and loss account

Question 13

Define amortisation

Answer 13

Amortization is similar to depreciation, but it applies to intangible assets such as trademarks. It refers to incrementally writing off an intangible asset over its useful life.

Question 14

What are the factors of production

Answer 14

Inputs needed for creating a good or service, which include land, labour, capital and enterprise

Question 15

Give two types of variance for budegeting

Answer 15

Note that costs and revenue can be budgeted. If a figure is better than budgeted the variance is favorable, or it’s adverse if not.

Question 16

Give difficulties of budegeting

Answer 16

• Unreliable sales data distorts budgets
• Could create conflict between different departments as they feel money if unfairly allocated - decreasing motivation.
• May restric innovation - allowing increased spending could benefit LT growth.
• Time consuming to produce

Question 17

Describe the contents of a Statement of financial position (Balance sheet)

Answer 17

• Assets (current & non-current) e.g. macheniry and cash, trade recievables
• Current assets are expected to be changed into cash within the next 12 months
• Liabilities (current & non-current) e.g. overdraft
• Capital - money put into the busines by owners, including sources of finance
• Net assets and total equity (shareholders equity - money owed to owners of business)
• Assets = liabilities as all recourses purchases by a business have to be finance via either capital or liabilities
• Assets = capital + liabilities

Question 18

Give the formulas for working capital, current ratio, acid test ratio

Answer 18

• Working capital = current assets - current liabilities
• Working capital is the money needed to fund the day to day trading expences of a business (e.g. tax, suppliers (trade creditors)
• Current ratio = current assets / current liabilities
• A current ratio between 1.5 and 2 suggests a business has sufficient liquid assets. Under 1 shows debts due in a year are greater than assets.
• Acid test ratio = current assets - invntories / current liabilities
• ATR of less than 1 means current assets - stock don’t cover liabilities. Some retailers can oprate comfortable in a ATR of less than 1 as their assets are sold quickly

Question 19

Give the budget variance formula

Answer 19

Actual amount - budegeted amount
Tip: think “A” for actual is first in the alphabet

Question 20

Give examples of current and non-current liabilities

Answer 20

Current liabilities: (money that must be repaid in a year) short term loans, overdrafts, trade and other payables (trade creditors like suppliers), tax

Non-current liabilities: (dosen’t have be repaid within a year) e.g. LT loans like mortages, pension funds

Question 21

Give internal and external causes of business failaure

Answer 21

Internal
* Lack of planning (e.g. sources of finance)
* Cashflow problems like over-borrowing, unforseen expenditure, allowing too-much credit, overtrading (funding large production volumes with inadwquate cash)
* Relying on a narrow customer base
* Innapropriate marketing strtergies (e.g. Product, price, promotion, place)
* Failire to innovate
External causes
* Competion - e.g. offering lower prices, superior products
* Legislation
* Changing consumer tastes
* Economic conditions (e.g. depression)

Question 22

Direct and indirect cost

Answer 22

• Direct Cost: a cost directly associated with the production of a specific product or providing of a service. E.g. raw materials
• Indirect cost: costs not directly associated to a specific product or service e.g. labor, marketing