3.5.3 Making financial decisions: source of finance

Question 1

What is a budget?

Answer 1

-Maximum amount you have to spend
-Setting a limit especially for your costs
-Sales revenue/income

Question 2

Budget

Answer 2

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

Question 3

Source of information for a budget

Answer 3

-Financial statements
-Past data
-Market research (trends, customer feedback, competition)

Question 4

Budget advantages

Answer 4

-Stops overspending/cash flow
-Helps to meet financial targets
-Motivate employees
-Helps with decision making

Question 5

Budget disadvantages

Answer 5

-Some budgets can be unrealistic
-Monitor budgets
-Potential for conflict
-May be restrictive

Question 6

Variance calculation

Answer 6

Difference between budgeted figure and variance

Question 7

Favourable variance

Answer 7

Profits and sales revenue are higher than expected and costs are lower than expected

Question 8

Adverse variance

Answer 8

Profits and sales revenue are lower, costs are higher

Question 9

Income budget

Answer 9

-A target set for the amount of revenue to be achieved in a certain set time period
-Split by department
-Informed by market research and sales forecast
-Used for predicting cash inflows in the cash flow forecast

Question 10

Expenditure budget

Answer 10

-A limit placed on the amount to be spent in a given period of time
-Split by department function/product
-Responsibility can be paused to individual managers
-Used for predicting cash flows in cash flow forecast
-Allows for monitoring of under-spending as well as overspending

Question 11

Profit budget

Answer 11

-A target set for the surplus between income and expenditure in a given period of time
-Calculated based on the income and expenditure budget
-May be set for the business as a whole or individual departments/brands/products
-Used to inform decision making including where cuts may need to be made

Question 12

Approaches to budgeting

Answer 12

Historical- looking at previous years figures
Zero- budgeted costs and revenues are set to zero, based on new proposals for sales and costs

Question 13

Causes of adverse variances

Answer 13

-Waste
-Labour productivity
-Competition
-External factors (PESTLE)

Question 14

Causes of favourable variances

Answer 14

-Motivated staff
-Level of demand
-Good management
-Good suppliers

Question 15

Possible reponses

Answer 15

-Change suppliers
-Change budgets
-Reallocate budgets
-Change marketing tactic
-Review product portfolio