2.2 financial planning Flashcards
what is sales volume?
- the amount of output sold in a particular time period
what is the formula for sales volume?
selling price
what is sales revenue?
- the value of output sold in a particular time period
what is the formula for sales revenue?
price X sales volume
what is a fixed cost?
- costs which don’t change with the level of output
what are variable costs?
- costs which change directly with the changes to output
what is a semi-variable costs?
- a costs that consist of both fixed and variable element
- e.g labour
what’s the formula for variable costs?
- variable cost Pu X units produced
what’s the formula for total costs?
variable costs + fixed costs
what’s the formula for average costs?
output
what’s the formula for profit?
revenue - total costs
what is capital expenditure?
- money spent on long term assets such as buying a factory
what is revenue expenditure/
- money spent on buying day to day items such as raw materials
what is a debtor?
- owes the business money
what is a creditor?
- owes 3rd parties money
what does insolvent mean?
- a business doesn’t have enough cash to pay costs
what’s the formula for net cash flow?
inflows - outflows
what’s the formula for closing balance?
opening balance + net cash flow
what is liquidity?
- ease with which assets can be turned into cash
what is capital?
- the amount of money which has gone into the business
what is sales forecasting?
- projection of future sales revenue, often based on previous sales data
what is time series data?
- a method that allows a business to predict future levels from past figures
what is extrapolation?
- forecasting future trends based on past data
what are benefits of sales forecasting?
- helps inform cash flow forecasting and accurate budgeting
- enables them to predict appropriate staffing levels
- helps understand demand
what is the Delphi method?
- involves getting a group of market experts to provide an opinion on the forecasting task
what does breakeven mean?
- where a business makes neither a profit or a loss
what’s the formula for breakeven?
- total costs = total revenue
what are 3 ways to find breakeven?
- calculate using a table of costs and output
- interpreting charts
- using a formula
what is margin of safety?
- the difference between the actual units of output and the breakeven output
what’s the formula for margin of safety?
current output - breakeven output
what does contribution do?
- looks at the profit made on individual products
- used to calculate how many items need to be sold to make profit
what is contribution?
- the difference between the selling price and variable costs
what’s the formula for contribution Pu?
selling price Pu- variable cost Pu
what’s the formula for total contribution?
contribution Pu X number of units sold
what’s the formula for breakeven output?
contribution
what is a budget?
- a quantitative economic plan prepared and agreed in advance
what is budgetary control?
- involves making future plans
what is the purpose of budgeting?
- control and monitoring
- planning
- communication
- improves financial efficiency
- improve motivation
what is a revenue budget?
- expected revenue and sales
- broken down into more detail (products, location)
what is a cost/expenditure budget?
- expected costs based on sales budget
- overheads and other fixed costs
what is a profit budget?
- of great interest to share holders
- based on combined sales and cost budget
what are the 2 main approaches to budgeting?
- historical budgeting
- zero based budgeting
what is historical budgets?
- uses last years figures as the basis for the budget
why may historical budgeting be useful?
- based on actual results
why may historical budgets be bad?
- circumstances may have changed
- doesn’t encourage efficiency
what is a zero based budget?
- budgets costs and revenue are set to zero
- budget is based on new proposals for sales and costs
what are advantages to using a zero based budget?
- potentially more realistic
what are disadvantage of using zero based budgets?
- time consuming
- more complicated
what is a variance analysis?
- when there is a difference between actual and budget figures
what can variances be?
- positive/favourable (better than expected)
- adverse/unfavourable (worse than expected)
what is a favourable variance?
- costs are lower than expected
- revenue is higher than expected
what is an adverse variance?
- costs are higher than expected
- revenue is lower than expected
what are possible causes of favourable variances?
- stronger market demand than expected
- selling process increased higher than budget
- cautious sales and cost assumptions
what are possible causes of adverse variances?
- unexpected events lead to unbudgeted costs
- over spends
- sales forecast prove over optimistic
- market conditions
what are problems and limitations of budgets?
- are only as good as data being used
- can lead to inflexible decision making
- need to be changed as circumstances change
- can add to demotivation if unrealistic
