financial planning Flashcards
What is demand?
The amount of a product that consumers are prepared to buy
-Can be measured in terms of volume or value
what are revenues?
The amount of a product that customers actually buy from a firm
factors affecting demand
-Price
Income
Taste and fashion
Technological changes
Government decisions
Seasonal changes
Social and demographic
Competitor actions
How do you calculate revenue?
total revenue = volume sold x selling price
what are two ways to increase revenue
- Increase quantity sold.
-By cutting price or offering volume related incentives - Achieve a higher selling price.
what are costs?
-Amounts that a business incurs in order to make goods and or services
why are costs important?
-They drain away profit from the business
-Difference between making a good or bad profit margin
-Main cause of cash flow problems
-Change as the output or activity of a business changes
What are fixed costs?
-costs that do not change as output varies
-They increase the risk of a start-up
-E.g. rent and rates, salaries and advertising
what are variable costs?
- costs that do change as output varies
-E.g. brought in stocks, marketing cost based on sales and raw materials
-Lower risk for start-up, as no sales mean no variable costs
what are semi-fixed costs
-Some costs are fixed in the short term, but then change once a certain level of output is reached
-E.g. admin salaries, stay fixed until workload means someone else is needed
-E.g. rent as you may need more space with increased output
Equation for total costs
total cost= fixed cost+ variable cost
What are four ways of reducing average costs
- spreading fixed costs.
- Reducing the amount paid for resources and materials.
- Increasing efficiency of labour by increasing motivation.
- By achieving economies of scale.
What is profit?
The reward or return for taking risks and making investments
-it’s a financial objective and the most important important source of cash flow
Equation for profit
total sales-total cost
what is a breakeven point
The point at which total revenue equals total costs
-Breakeven analysis helps businesses make decisions about prices, costs and level of sales
What is turnover or sales revenue?
The money a business receives from selling goods
what is the equation for contribution per unit?
Selling price per unit-variable cost per unit
what is the margin of safety?
The difference between actual output and the breakeven output
-Only occurs when a business is above the breakeven point
benefits of breakeven
-focuses on what output is required before business achieves profitability
-Helps management and finance providers understand, viability and risk of businesses
-Illustrates the importance of keeping fixed costs down
-Calculations are quick and easy
limitations of breakeven
-Unrealistic assumptions-products are not sold at the same price at different levels of output as fixed costs do vary
-Sales are unlikely to be the same as output-wasted output
-Variable costs do not always stay the same
-A planning aid rather than a decision making tool
What are budgets?
A financial plan for the future concerning the revenues and costs of a business
what is the budgeting process?
-Budgets for revenues and costs are prepared in advance
-Compare with actual performance to budgeted amount to identify variances
what are the uses of budgets for management?
-Control income and expenditure
-established priorities and set targets
-Turn objectives into practical reality
-Provide direction and coordination
-Assign responsibilities
-Communicate targets
What are the principles of effective budgeting?
-managerial responsibilities are clearly defined
-Managers have a responsibility to adhere to their budgets
-Performance is monitored against budget
