chpater 6

Question 1

define recurring revenue streams

Answer 1

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

Question 2

define transactional revenue streams

Answer 2

represent those for which a single sale can be made without any further customer obligation - requires subsequent transactions from the same customer to continue earning revenue

Question 3

define revenue drivers

Answer 3

things that drive revenue = usually going to be a function of either volume or price - price is easily controllable but volume isn’t as it’s a by-product of price

Question 4

define cost structures

Answer 4

represent all the expenditures that an organization incurs to be able to earn revenue

Question 5

what are cost drivvers

Answer 5

all the inputs that drive costs

Question 6

what are the cost drivers fo COGS

Answer 6

volume purchase + cost

Question 7

what are the cost drivers of salaries + wages

Answer 7

number of employees + average salary or wage per employee

Question 8

what are the cost drivers of SG&A

Answer 8

various - down to the value trade-off: will the amount of time required to analyze the individual items add sufficient enough value to warrant conducting that analysis

Question 9

what are the cost drivers of depreciation

Answer 9

type/category of assets owned - depreciation rate/method for each asset type

Question 10

what are the 2 types of financial analysis

Answer 10

horizontal + vertical analysis - mainly only for internal use

Question 11

what’s horizontal analysis

Answer 11

comparing line items over a span of time - the variances in these items across periods - the level of detail is a management decision that ultimately comes down to who the internal users of the info are and what info is required for effective decision-making - time horizon for analysis can vary from organization

Question 12

what are the 3 most common time horizon for analysis

Answer 12

monthly, quarterly, yearly

Question 13

what’s vertical analysis

Answer 13

compares a journal account, grouping or financial statement line item to a base - representing 100% - to be meaningful, vertical analysis needs comparative figures

Question 14

how to make horizontal and vertical analyssi more useful

Answer 14

budget data to compare with actual results

1. whether their expectations of future performance are reasonable
2. whether and why they performed, or didn’t perform as expected

Question 15

importance of gross margin

Answer 15

use to compare with other reports

examine gross margins of its competitors to see if it’s being effective at securing competitive inventory prices or not pricing its products competitively

Question 16

importance of gross margin

Answer 16

represents the percentage of total revenue left over after all operating expenses have been paid

strong (high) operating margin indicates that the company’s operations are effective enough at driving the company’s growth - signals that the company doesn’t necessarily need external financing to be successful in the foreseeable future

this metric is most useful when tracked across time or compared to an industry average or competitors

Question 17

define benchmarking

Answer 17

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

Question 18

what’s the importance of net profit margin

Answer 18

interprets how many cents of profit the business generates for each dollar of sales made - most useful when compared across time or in benchmarking

importance due to its widespread implications on obtaining financing - as potential lenders will look at this metric to determine whether a company can pay back it’s debt obligations and equity investors will compare it to other companies to attempt to determine the most attractive investment option

plays a key role in company valuations in IPOs

Question 19

define a budget

Answer 19

an estimate of a company’s financial results for the next fiscal year - remain static after approved - used to set internal financial targets for the fiscal year

provides valuable info to internal management to understand how business segments are performing when compared to budget + make decisions to improve performance

Question 20

define the strategic planning process

Answer 20

lays out the company’s operational + financial plans over the medium to long-term

Question 21

budgets + internal vs external stakeholders

Answer 21

internal stakeholders get a detailed budget

external are informed of budgets at a high level

Question 22

what’s the financial planning and analysis team

Answer 22

responsible for all the functions of financial analysis, budgeting, forecasting

Question 23

why is the process of budgeting quite significant + challenging

Answer 23

preparation of budget requires active participation from every business segment - highly-collaborative

Question 24

define top-down budget

Answer 24

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

Question 25

define bottom-up budget

Answer 25

drives by lower-level staff and management, with little to no guidance from senior management

Question 26

define hybrid budgeting

Answer 26

executive expectations + targets are interpreted more so as guidelines - there’s a degree of flexibility for FP&A team to maneuver within, although straying too far is not advisable

typically the most efficient budgeting process

Question 27

define stretch targets

Answer 27

financial objectives that are meant to be challenging to attain

Question 28

what’s the budget process

Answer 28

one initial budget is completed, there’s reviews, modifications + revision - can happen several time

once complete it’s then reviewed by BoD then if approved, is communicated internally across all departments + business units, public companies may communicate select financial targets externally to shareholders/the market (targets that are still challenging but more achievable than the internal targets - done deliberately to not negatively affect shareholders + potential investor perceptions)