2.5-managing finance Flashcards
The breakeven point is
The point at which revenue equals cost so your business is making neither a profit nor a loss
Total costs are the fixed and variable costs added together
Revenue (calculation)
Selling Price x Units Sold
-Money into the business through sales
Fixed costs
These are costs that do NOT vary with the level of output or sales. E.g. stall rental.
Variable costs
These are costs that DO change with the level of output or sales. For example, the plastics used in a Bobblehead. The more a business sells/produces, the more plastic they will need
Contribution
Contribution = Selling Price – Variable Costs
Breakeven calculation
Break even = Fixed Costs / Contribution
ALWAYS ROUND UP
Margin of safety (MOS)
-Difference between actual sales and break even point.
Limitations of break even
-Break-even analysis assumes that every item produced is sold
-In a service business the prices may differ
-Costs may increase
-Its only a best guess of what may happen
-In some businesses the fixed costs are shared across a portfolio of products
A budget is
Is a financial plan and an agreed spending limit within a business
-Budgets are based on the objectives of the business or organisation
-It means managers must think ahead and not just spend an unlimited amount of money in their department
-Usually 12 months so that it fits with the accounting period of a year, but research and development budgets (e.g. a cure for cancer) might have a longer term budget
Planning
Planning: to anticipate problems and develop solutions before they arise e.g. New business books are needed for a new spec
Motivation
Motivation: for managers to be in control of their own budget shows that the business feels they are responsible and will hold them accountable for the money
Decisions
Decisions: gives power to make financial decisions to those in the best position to make them e.g. a Headteacher may not know what kinds of books need to be ordered
Control
Control: Budgets are set against objectives and targets and can be used as a comparison tool to measure success
2 types of budget
-Historical Figures Budget
-Zero Based Budget
Historical figures budget
-This is a budget set for the business using current financial figures
-Realistic in that it is based on last years sales
-Business is dynamic so the figures may be wrong
-How much money will you spend?
-How much will you sell?
-How can you cut costs?
Zero based budget
-This is a budget set for a business by using figures based on potential performance
-This method takes away all historical assumptions and starts with a clean slate
-May also be used by a start-up with no historical data
-Managers must justify levels of expenditure based on the number of customers they are likely to serve in the next year
Benefits of budgeting
-provide a method of allocating and using resources within the organisation
-help to monitor and control operations
-promote forward thinking
-show employees an overall picture of the direction of the organisation which can motivate staff
-help to co-ordinate different departments and align them towards shared objectives
Disadvantages of budgeting
-The time that workers give to the budgeting process means they are not available to carry out other responsibilities.
-Errors and inaccuracies will always remain since it is impossible to predict the future.
-Budgets involve and affect people, they may cause conflict. There may be difficult choices over where limited funds are spent.
A variance is
A variance is when you compare the budget figures against what actually happens.
Favourable variance –
Favourable variance – the manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit
Adverse variance –
Adverse variance – the manager has overspent and it would depend on the reasons, perhaps they needed moremstaff than was budgeted for and had to hire during the year
Difficulties of budgeting
-Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic
-Tendency for managers to spend up to the limit
-Time consuming to prepare, monitor and control
-Unrealistic budgets can be demotivating
-Budgets can cause inter-department rivalry as some departments get more money than others
-Can make managers short-sighted, they become budget driven rather than customer driven
-Some industries its difficult to plan ahead because of large unplanned changes e.g. farmer and weather
Profit and loss account
A profit and loss account is a financial document showing the company revenue or income over the year and their costs and expenditure
-Also known as Statement of comprehensive income
-End of the trading year the business owner prepares a profit and loss account
-Provides a summary of profit or loss made during the year
Sales Revenue
The money obtained from sale of goods or services
