Financial planning 2.2 Flashcards
How do you work out break-even output?
Fixed costs/contribution per unit
How do you work out contribution?
Selling price - variable cost per unit
How do you work out margin of safety?
Actual sales output - break-even output
Give three reasons why would a business produce a business plan?
-Attract potential investors
-To set targets
-To identify early problems before they happen
What is cash inflow?
Money coming into the business
What is cash outflow?
Money going out of the business
What are three factors impacting cash flow?
-Consumer trends
-Economic variables
-Competitors actions
How can a business fix issues with cash flow?
-Reduce a certain expense
-Short term loan
What are three issues with cash flow forecasts?
-Only an estimation, actual sales and expenses may be more or less than estimated + can’t predict external shocks
-Only a 12 month snapshot
-Needs regular updating
What is sales volume?
The number of units sold
What is sales revenue?
Sales volume x price
What are fixed costs?
Costs that don’t vary directly with the level of output
What are variable costs?
Costs that vary directly with the level of output
What are three examples of fixed costs?
-Rent
-Taxes
-Salaries
What are three examples of variable costs?
-Raw materials
-Packaging
-Piecework wages
What is break-even?
The minimum level of sales needed to cover costs
What can a break-even chart, other than break-even output, tell a business?
-The level of profits or losses made at every possible output
-Margin of safety
What is margin of safety?
The amount by which demand can fall before the firm starts making losses
How will a price rise effect break-even output?
-Revenues will rise
-Lower the break-even output
What are the limitations of break-even analysis?
-Assumes variable costs will increase constantly, doesn’t take into account bulk buying
-Assumes all output will be sold
-Static model, does not take sale trends into account and is only true at one point in time
-Difficult for businesses who sell many products
What are the uses of break-even analysis?
-Assess the impact of planned price changes upon profit and break-even
-Estimate the future level of output needed to produce future profit targets
-Allows entrepreneurs to assess how long it will take before the business is profitable
Why are budgets used?
-Ensure departments dont spend more than a business expects
-To create a measurable way of assessing managers success
-Motivate staff in a department
