Chapter 6

Question 1

what is a transactional revenue stream?

Answer 1

represent those for which a single sale can be made, without any further customer obligation.

ex. products, usage, advertising

Question 2

What is a recurring revenue stream

Answer 2

represent those where a customer is locked into an obligation to pay a recurring amount based on some set frequency.

ex. rental, lease, subscription

Question 3

what are revenue drivers

Answer 3

Revenue drivers are literally the things that drive revenue. To simplify things, these are usually going to be a function of either volume or price.

Question 4

why are revenue drivers important

Answer 4

Revenue drivers are important to understand because they can provide us with important information when we start to analyze the performance of a company.

Question 5

what are cost drivers

Answer 5

cost drivers depend on what type of cost is being analyzed. Therefore, when analyzing performance by examining costs, you must first consider the type of cost you’re analyzing and then determine what drives it to be able to provide meaningful analysis and make well-informed decisions.

Question 6

what is a horizontal analysis

Answer 6

Horizontal analysis involves comparing line items over a span of time or, more specifically, the variances in these items across periods.

Question 7

what is a vertical analysis

Answer 7

Vertical analysis compares a journal account, grouping, or financial statement line item to a base, representing 100%. Typically, total assets are used as the base for balance sheet accounts and line items, while total revenue is used as the base for income statement accounts and line items.

Question 8

What is gross margin

Answer 8

gross profit is expressed in dollars and presented on the income statement on virtually all merchandising and manufacturing companies.

GM = Gross Profit / total revenue

*higher the better

Question 9

What is Operating Margin (EBIT Margin)

Answer 9

This metric represents the percentage of total revenue left over after all operating expenses have been paid and is expressed as follows:

= EBIT / Total revenue

*higher the better

Question 10

What is benchmarking

Answer 10

The analytical process of comparing a company’s metrics to the rest of the industry or competitors

Question 11

What is Net profit margin?

Answer 11

indicates what percentage of total revenue remains after all costs are paid. It is expressed as follows:

= net income / total revenue

*higher the better

Question 12

what is a budget

Answer 12

an estimate of a company’s financial results for the next fiscal year. Budgets are set before a fiscal year starts and once they are approved and finalized, they remain static

Question 13

what is the strategic planning process?

Answer 13

which lays out the company’s operational and financial plans over the medium to long term

Question 14

what are the financial planning and analysis

Answer 14

teams in larger organizations are responsible for all of the functions

In smaller organizations, there may not be a dedicated FP&A team, but certain individuals on the accounting/finance team will be tasked with these functions.

Question 15

what are top-down budgets

Answer 15

are those driven by executive management, with little to no input from the lower organizational levels

Question 16

what are bottom-up budgets

Answer 16

those that are driven by lower-level staff and management, with little to no guidance from senior management

Question 17

what is hybrid budgeting

Answer 17

executive expectations and targets are interpreted more so as guidelines—there’s a degree of flexibility for the FP&A team to maneuver within, although straying too far from them is not advisable. Because hybrid budgeting typically leads to the most efficient budgeting process, the remainder of this discussion assumes this approach.

Question 18

what are stretch targets

Answer 18

financial objectives that are meant to be challenging to attain