financial planning

Question 1

What is demand?

Answer 1

The amount of a product that consumers are prepared to buy
-Can be measured in terms of volume or value

Question 2

what are revenues?

Answer 2

The amount of a product that customers actually buy from a firm

Question 3

factors affecting demand

Answer 3

-Price
Income
Taste and fashion
Technological changes
Government decisions
Seasonal changes
Social and demographic
Competitor actions

Question 4

How do you calculate revenue?

Answer 4

total revenue = volume sold x selling price

Question 5

what are two ways to increase revenue

Answer 5

1. Increase quantity sold.
   -By cutting price or offering volume related incentives
2. Achieve a higher selling price.

Question 6

what are costs?

Answer 6

-Amounts that a business incurs in order to make goods and or services

Question 7

why are costs important?

Answer 7

-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

Question 8

What are fixed costs?

Answer 8

-costs that do not change as output varies
-They increase the risk of a start-up
-E.g. rent and rates, salaries and advertising

Question 9

what are variable costs?

Answer 9

• 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

Question 10

what are semi-fixed costs

Answer 10

-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

Question 11

Equation for total costs

Answer 11

total cost= fixed cost+ variable cost

Question 12

What are four ways of reducing average costs

Answer 12

1. spreading fixed costs.
2. Reducing the amount paid for resources and materials.
3. Increasing efficiency of labour by increasing motivation.
4. By achieving economies of scale.

Question 13

What is profit?

Answer 13

The reward or return for taking risks and making investments
-it’s a financial objective and the most important important source of cash flow

Question 14

Equation for profit

Answer 14

total sales-total cost

Question 15

what is a breakeven point

Answer 15

The point at which total revenue equals total costs
-Breakeven analysis helps businesses make decisions about prices, costs and level of sales

Question 16

What is turnover or sales revenue?

Answer 16

The money a business receives from selling goods

Question 17

what is the equation for contribution per unit?

Answer 17

Selling price per unit-variable cost per unit

Question 18

what is the margin of safety?

Answer 18

The difference between actual output and the breakeven output
-Only occurs when a business is above the breakeven point

Question 19

benefits of breakeven

Answer 19

-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

Question 20

limitations of breakeven

Answer 20

-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

Question 21

What are budgets?

Answer 21

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

Question 22

what is the budgeting process?

Answer 22

-Budgets for revenues and costs are prepared in advance
-Compare with actual performance to budgeted amount to identify variances

Question 23

what are the uses of budgets for management?

Answer 23

-Control income and expenditure
-established priorities and set targets
-Turn objectives into practical reality
-Provide direction and coordination
-Assign responsibilities
-Communicate targets

Question 24

What are the principles of effective budgeting?

Answer 24

-managerial responsibilities are clearly defined
-Managers have a responsibility to adhere to their budgets
-Performance is monitored against budget

Question 25

what are favourable variances?

Answer 25

• when Actual figures are better than budgeted figures
  -Costs are higher than expected

Question 26

What are adverse variances?

Answer 26

-when the actual figure is worse than the budgeted figure
-Cost are higher than expected

Question 27

causes of favourable variances?

Answer 27

-stronger market demand than expected= increased actual revenue
-Increased selling prices higher than budgeted
-Cautious sales and cost assumptions
-Competitor weakness increases sales
-Better than expected productivity or efficiency

Question 28

causes of adverse variances

Answer 28

-Unexpected events, which lead to budgeted cost
-Overspends by budget holders
-Sales forecast prove optimistic
-Market conditions mean, selling prices are lower than budgeted

Question 29

What are the two main approaches to budgeting?

Answer 29

-historical budgets-based on historical information
-zero-based budgets-must allocate every pence in justify your spend, created from scratch at the start of each time period

Question 30

advantages of historical budgets?

Answer 30

-simple and quick
-Useful for businesses with a stable environment and little change year on year, and also who have had success with historical budgeting in the past

Question 31

disadvantages of historical budgeting?

Answer 31

-assumes incremental increases in previous years, so may lack accuracy and not be the most efficient use of resources
-Doesn’t encourage efficiency
-May not be suitable for a business, completing a major structural shift in strategic direction.

Question 32

advantages of zero-based budgets?

Answer 32

-Ensure all expenses are justified for new periods, so can achieve title cost control
-Useful for new businesses with no past data, businesses, shifting, direction, and restructuring
-Can optimise cost, not just revenue

Question 33

disadvantages of zero based budgets?

Answer 33

-Time consuming process
-Resource intensive process as you have to justify and review each element

Question 34

what is the three types of budgeting?

Answer 34

-Revenue budget
-Cost budget
-Profit budget

Question 35

what are the problems and limitations of budgets?

Answer 35

-Are only as good as the data being used
-Can lead to inflexibility on decision-making
-Need to be changed as circumstances changed
-Take time to complete and manage
-Can result in short term decisions to keep within the budget

Question 36

behavioural implications of budgets?

Answer 36

-Demotivating if imposed rather than negotiated
-Setting unrealistic targets can be demotivating
-Can contribute to departmental rivalry