2.2 Financial Planning and 2.4 Production Flashcards
What are the 3 types of budgets?
Income
Expenditure
Profit
How are the budgets interpreted?
Either adverse or favourable
Benefit of budgets
Allow businesses to plan for the future
Plan expenditure in advance
Reduce chance of overspending
Lower cash outflows
More likely to have a positive net cash flow
Drawback of budgets
Budgets limit spending
May not be able to heavily invest in R&D, NCA
Opportunity cost
What are the 2 main approaches to budgeting?
Historical and Zero-based
What is historical budgeting?
Setting a budget based on past years data.
What is the benefit of historical budgeting?
The budget manager is trusted to spend the budget as they seem fit, they are trusted therefore meeting Maslow’s esteem needs making them more motivated.
What’s the drawback of historical budgeting?
Using previous years data
May ignore changes in the market
Opportunities for expansion may be missed
Reducing the business scale
Lower output
Can’t benefit from EOS
What is zero-based budgeting?
The budget of made from scratch every year but all spending is justified by management.
What’s the benefit of zero-based budgeting?
Spending decisions are centralised
Lower chances of overspending
Reduced fixed/variable costs
Porter cost leadership strategy
Lower selling prices
Increase in demand
What’s the drawback of zero-based budgeting?
All spending needs to be justified
Requires market research to make predictions
Wages paid to researchers to prepare budgets
Increased cost of wages
Lower OP
Job production benefit
One off products are produced
Adapted to meet needs
Differentiated
PED
Job production drawback
Products are produced to customer specifications
Can’t be produced in mass
Can’t benefit from technical EOS
Lower productivity
Higher unit FC
Batch production benefit
Products made in batches
Wide product portfolio
Create batches of products targeted at multiple segments
Spread risk
Less vulnerable to changes in trends as products can be easily adapted
Constant sales
EOS/Liquidity
Batch production drawback
Products made in batches
Increased downtime as business adapts machinery between batches
Low capacity utilisation during downtime
FC spread over less units compared to flow production
Higher FC per unit
Lower operating profit margin
Flow production benefit
High volume of identical products made continuously
Through use of machinery
Technical EOS
Increase productivity
Increase output
Fc spread over more units
Lower unit FC
Flow production drawback
High volume of identical products are made continuously
Through the use of machinery
Damage a business’s liquidity in the short term
Significant investment into machinery
Reduced cash reserves in the short term
Liquidity
Cell production benefit
Employees coming together as teams to complete part of the production
Each team is set a target they need to work towards
Bringing each team together
Maslow’s love and belonging
Increase employee motivation
Increase productivity, output
FC spread over more units
Cell production drawback
Employees coming together as a team to complete part of the production process
Employees will need to be multi-skilled to work across the production process
Significant investment into training
Increasing expenses
Reducing operating profit
