(2.5 in Booklets) Managing Finance 2.3 Flashcards
The Break even Point is…
Where you only cover your costs
When your revenue equals total costs
Revenue
Selling Price x units sold
Money into the business through sales
Fixed Costs
Costs that do NOT vary with the level of output or sales e.g. stall rental
Variable Costs
Costs that DO change with the level of output or sales
Contribution
Selling price - Variable costs
Break Even
BE = Fixed Costs/ Contribution
Margin of Safety
Difference between the actual level of output and the breakeven
Limitations of a Break Even Point
Doesn’t account for external factors
You have to calculate it first
Makes assumptions
Prices may differ for services e.g. solicitor
Fixed costs may increase
Large product portfolios- prices differ and sales too
Budgets
Based on the objective of the business or organisation
Means managers must think ahead
Usually 12 months so that it fits the accounting period of a year
Why would businesses use a budget?
Planning, motivation, decisions, control
2 Types of Budget: Historical Figures Budget
Uses current financial figures
Realistic based on past performance
Cut costs
But people will waste some budget in order to spend it all
2 Types of Budget: Zero Based Budget
Set from potential performance
No past performance considered
Used by start up with no historical figures
Pros and Cons of Zero Based Budget
Pros: Don’t waste the budget
Cons: Takes a long time
Benefits of a Budget
Allows the business to plan what they are going to spend money on
Allocate resources within organisation
Monitor and control operations
Promote forward thinking
Motivate staff, gives direction
Cons of a Budget
Businesses are dynamic lots will change
Can be time consuming
Errors and inaccuracies will lead to overspending
Budgets may cause conflict
Favourable Variance
Manager has underspent budget in department, this is a success as any costs cut will have an impact on profit
Adverse Variance
Manager has overspent and it depends on reasons, perhaps it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year.
Difficulties of Budgeting
Budgets are often fixed, businesses are dynamic
Spend up to the time limit always
Time consuming
Unrealistic budgets can be demotivating
Budgets can cause inter-department rivalry
Can make managers short term focused
Difficult to plan ahead due to large unplanned changes
Variance
What occurs when comparing the expected figures and what actual figures are.
Variance Analysis
When you decide if the variance is favourable or adverse
Direct Costs
Costs of production, wages, bills etc
The more you make, the more costs
Indirect Costs
Costs that aren’t for production
Profit and Loss Account
Also known as statement of comprehensive
End of trading year, the owner prepares a profit and loss account
Provides a summary of profit or loss made during the year
A profit and loss account is a financial document showing the company revenue or income over they year and their costs and expenditure
Costs of Sales
Costs that can be directly attributed to the sales, depends on the no. sales
