2.2 Financial Planning Flashcards

Question

How to calculate average cost

Answer 1

Total cost __________ Output

Answer 2

Actual sales are higher than predictions

Answer 3

Actual sales are lower than predictions

Answer 4

The point when total revenue is equal to total costs and neither a profit or a loss is being made

Answer 5

Fixed costs ___________ Contribution per unit Answer always given in units

Answer 6

The amount of money that contributes towards paying off fixed costs Also the difference between the variable costs of one unit and it’s selling price

Answer 7

Selling price- variable cost per unit

Answer 8

Total output x contribution per unit

Answer 9

Can see how many products need to be sold to make a profit and whether the business model is realistic Can be used to analyse the impact of varying customers, prices and costs on a business’s profit Simple and easy to use The break even point is a useful guideline to help business make decisions

Answer 10

Reliant on market research Need to calculate accurate costs and revenue Can get complicated because it simplifies what can be a complex process as most businesses sell multiple products which makes break even more difficult Might not sell the break even level Break even focuses on output - presumes that the business will sell all of its output at the same price Costs are rarely constant and break even analysis presumes that costs stay the same over various levels of output

Answer 11

The difference between the break even point and the current level of output. The size of the margin of safety will determine the risk of the business the margin of safety should be as high as possible

Answer 12

To evaluate the potential of a business to make a profit based on its output Eg a business with a high break even point will have to produce and sell a lot before it starts to make a profit A small margin of safety could also suggest any negative impact on output or demand could lead to the business making a loss

Answer 13

A financial plan for the future concerning the revenues, costs and profits of a business

Answer 14

To ensure efficiency in spending Setting budgets allows large businesses to be coordinated and can be a way of motivating employees who are allocated a budget

Answer 15

The process by which financial control is exercised in a business Budgets for revenues, costs and profit are prepared in advance and then compared with actual performance to establish any variances Managers are responsible for controllable costs within their budgets Managers take action if adverse variances are regarded as excessive

Answer 16

Establish priorities and set targets Turn objectives into practical reality Provide direction and coordination Assign responsibilities Allocate resources Communicate targets Delegate without loss of control Motivate staff Forecast outcomes Monitor performance Control income and expenditure

Answer 17

Revenue (or income) budget Cost (or expenditure) budget Profit budget

Answer 18

Expected revenues Broken down into detail ( products/ locations)

Answer 19

Expected variable costs based on sales budget Expected fixed costs

Answer 20

Based on the combined sales and cost budgets May form basis for performance bonuses

Answer 21

Analyse market Draw up revenue budget Draw up cost budget

Answer 22

A budget is only as accurate as the data on which it’s based Last trends can be a poor indicator of what is likely to happen in the future, therefore it can be very difficult to forecast sales New decisions taken by governments and public bodies can affect budgets eg interest rate changes and employment legislation Unexpected changes in process can impact budgets eg commodity prices When a budget is unrealistic it loses all value as a motivational tool Can lead to inflexibility in decision making Need to be changed as circumstances change Take time to complete and manage Can result in short term decisions to keep within the budget Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers

Answer 23

•Sales forecasting - harder when market experiences rapid change eg new technology - start up firms find it hard to estimate likely sales and revenues - competitor actions difficult to predict •costs - always likely to be unexpected costs - will vary depending on sales budget - changes in external environment will impact costs eg taxes, exchange rates

Answer 24

Budgeting has behavioural implications for motivating employees Budgets are demotivating if they’re imposed rather than negotiated Setting unrealistic targets adds to demotivation Budgets contribute to departmental rivalry battles over budget allocation Spending up to budget can result in a ‘use it or lose it’ mentality A ‘name, blame and shame’ culture can develop

Answer 25

Involves calculating and investigating the differences between actual results and the budget A variance arises when there is a difference between actual and budget figures Variances can be: Positive/ favourable (better than expected) Adverse/ unfavourable ( worse than expected)

Answer 26

Actual figures are better than budgeted figure Eg costs lower than expected Eg revenue/ profits higher than expected

Answer 27

Actual figure worse than budget figure Eg costs higher than expected Eg revenue/ profits lower than expected

Answer 28

Stronger demand than expected-> higher actual revenue Selling prices increased higher than budget Cautious sales and cost assumptions eg cost contingencies Better than expected productivity or efficiency

Answer 29

Unexpected events lead to unbudgeted costs Over spends by budgeted holders Sales forecasts prove over optimistic Market conditions mean demand is lower than budget eg competitor actions

Answer 30

Managerial responsibilities are clearly defined Individual budgets lay down a plan of action Performance is monitored against the budget Corrective action is taken if results differ significantly from the budget Departures from budgets are permitted only after approval from senior management Unaccounted for variances are investigated

Answer 31

Whether is favourable or adverse Whether it was foreseen Whether it was foreseeable How big the variance was- absolute size ( money terms) and relative size (% terms) The cause Whether it’s a problem or the result of a long term trend

Answer 32

The name given to the process of focusing on activities that require attention + ignoring those that appear to be running smoothly Budget control And analysis of variances facilitates management by exception since ur highlights areas of business performance which aren’t in line with expectations

Answer 33

Both large and small businesses. Small business owners often underestimate the importance of financial control when running their business and budgeting is a method of control that could easily be employed. This might help avoid problems in the future

Answer 34

Control and monitoring- by setting objectives and targets. How successful the business has been can be found by comparing actual results with budget Planning- forces management to think ahead Co-ordination- larger business can be complex with many departments and may be spread across the world Efficiency- in a business with many workers it’s important for management to empower staff by delegating decision making. Budgeting gives financial control to lower levels of management Motivation- budgeting should act as motivator to the workforce by providing targets

Answer 35

When historical data is not available a zero based budget might be adopted With ZBB the opportunity costs of all spending decisions is considered. Any spending has to be justified by the budget holder to ensure all spending is good value for money.

Answer 36

The allocation of resources should be improved A questioning attitude is developed which will help to reduce unnecessary costs and eliminate inefficient practices Staff motivation might improve because evaluation skills and practices and a greater knowledge of the firms operations might develop Encourages managers to look for alternatives

Answer 37

Time consuming as the budgeting process involves the collection and analysis of quite detailed information so spending decisions can be made Skilful decision making is required. Such skills may not be available in the organisation. In addition, decisions may be influences by subjective opinions It threatens the status quo. This might adversely affect motivation Managers may not be prepared to justify spending on certain costs. Money, therefore may not be allocated to spending which could benefit the business

Answer 38

A business might give each department a ‘base’ budget. Departments could then be invited to bid for increased expenditure on a ZBB basis

Answer 39

Involves a business using budgets to look into the future, stating what it wants to happen and deciding how to achieve these aims

Answer 40

Preparation of plans - all businesses have objectives. Targets are usually set which allows the business to see whether its objectives have been met. The results can then be compared with the targets set Comparisons of plans with actual results- control will be effective if information is available as quickly as possible. At the end in the period the actual results can be compared with targets set in the budget Analysis of variances- most important stage. It involves trying to find reasons for the differences between actual and expected financial outcomes.

Answer 41

A variance in budgeting is the difference between the figure that the business has budgeted for and the actual figure. They’re usually calculated at the end of the budget period as that’s when the actual figure will be known They can be favourable or adverse Managers will examine variances and try to identify reasons why they have occurred. By doing this they might be able to improve the performance of the business in the future

Answer 42

Wages, materials, overheads and sales revenue

Answer 43

Setting budgets- problems may arise as figures in budgets aren’t actual figures. The figures are plans based on historical data, forecasts or human judgement. The most important data in the preparation of nearly all budgets is sales data. If this is inaccurate, many of the firms budgets will be in exact. Setting budgets may lead to conflict between staff/ department Manipulation- budgets can be manipulated by managers to make it easy to achieve so they look successful but it won’t be helping the business much Motivation- in some businesses, workers are left out of the planning process. if workers aren’t consulted about the budget it could be difficult to use it to motivate them Rigidity- budgets can sometimes constrain business activities. Eg departments may have different views about replacing vehicles- the newer vehicles will have lower maintenance costs but the replacing them will be high cost Short terminism- some managers nught be too focused on the current budget and may take actions that undermine the future performance of the business just to meet current budget targets. It may save costs now but could lead to customers drifting away due to poor service