Financial planning 2.2

Question 1

How do you work out break-even output?

Answer 1

Fixed costs/contribution per unit

Question 2

How do you work out contribution?

Answer 2

Selling price - variable cost per unit

Question 3

How do you work out margin of safety?

Answer 3

Actual sales output - break-even output

Question 4

Give three reasons why would a business produce a business plan?

Answer 4

-Attract potential investors
-To set targets
-To identify early problems before they happen

Question 5

What is cash inflow?

Answer 5

Money coming into the business

Question 6

What is cash outflow?

Answer 6

Money going out of the business

Question 7

What are three factors impacting cash flow?

Answer 7

-Consumer trends
-Economic variables
-Competitors actions

Question 8

How can a business fix issues with cash flow?

Answer 8

-Reduce a certain expense
-Short term loan

Question 9

What are three issues with cash flow forecasts?

Answer 9

-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

Question 10

What is sales volume?

Answer 10

The number of units sold

Question 11

What is sales revenue?

Answer 11

Sales volume x price

Question 12

What are fixed costs?

Answer 12

Costs that don’t vary directly with the level of output

Question 13

What are variable costs?

Answer 13

Costs that vary directly with the level of output

Question 14

What are three examples of fixed costs?

Answer 14

-Rent
-Taxes
-Salaries

Question 15

What are three examples of variable costs?

Answer 15

-Raw materials
-Packaging
-Piecework wages

Question 16

What is break-even?

Answer 16

The minimum level of sales needed to cover costs

Question 17

What can a break-even chart, other than break-even output, tell a business?

Answer 17

-The level of profits or losses made at every possible output
-Margin of safety

Question 18

What is margin of safety?

Answer 18

The amount by which demand can fall before the firm starts making losses

Question 19

How will a price rise effect break-even output?

Answer 19

-Revenues will rise
-Lower the break-even output

Question 20

What are the limitations of break-even analysis?

Answer 20

-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

Question 21

What are the uses of break-even analysis?

Answer 21

-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

Question 22

Why are budgets used?

Answer 22

-Ensure departments dont spend more than a business expects
-To create a measurable way of assessing managers success
-Motivate staff in a department