Theme 2: Section 7 Financial Planning

Question 1

Sales Forecasting

Answer 1

Predicting future sales/volume.

Question 2

Sales Revenue and formula

Answer 2

Past sales data, Market Research.
Selling Price x Sales Volume.

Question 3

Sales Volume and Formula

Answer 3

Number of units sold in a time period.
Sales Revenue/Selling Price.

Question 4

Fixed Costs

Answer 4

Don’t change without output, rent.

Question 5

Variable Costs

Answer 5

Rise/Fall as output changes, wages, raw materials.

Question 6

Total Variable Costs Formula

Answer 6

Average Variable Cost x Quantity Produced

Question 7

Total Costs Formula

Answer 7

Fixed Costs + Variable Costs

Question 8

Profit and Formula

Answer 8

Deduct Total Costs from Total Revenue.
Total Revenue - Total Costs.

Question 9

Break-Even point (Output) and Formula

Answer 9

Level of Sales a business needs to cover Total Costs.
Total Fixed Costs + Total Variable Costs= Total Revenue.

Question 10

Contribution Per Unit and Formula

Answer 10

Difference between Selling Price and Variable Cost.
Selling Price - Variable Cost Per Unit.

Question 11

Total Contribution (Contribution from units sold).

Answer 11

Used for Fixed Costs.

Question 12

Break-Even Point and Formula

Answer 12

Total Contribution=Fixed Costs.
Total Fixed Costs/ Contribution Per Unit.

Question 13

Margin of Safety Formula

Answer 13

Actual Output - Beak-Even Output

Question 14

Break-Even Analysis Advantages

Answer 14

Easy to do if accurate plots, easier to persuade for source of finance.

Question 15

Break-Even Analysis Disadvantages

Answer 15

Inaccurate data has wrong results, it tells how many units for Break-Even not how many going to actually sell.

Question 16

Budget

Answer 16

Forecast future earnings/Spending over 12 month period.

Question 17

Income Budgets

Answer 17

Forecast many coming into business as Revenue.
Predict how much sell, what price using previous sale figures/Market Research.

Question 18

Expenditure Budgets

Answer 18

Predict Total Costs for the year.
Variable Costs increase with output, predict output on sale estimate.

Question 19

Profit Budgets

Answer 19

Income budget minus expenditure budget to calculate profit or loss for the year.

Question 20

Budgeting Benefits

Answer 20

Motivating, employee targets.
Helps controls Income, expenditure.
Helps focus on priorities.

Question 21

Budgeting Drawbacks

Answer 21

Prices can change, inflation.
Struggle get data, inaccurate budget.

Question 22

Historical Budgets, updated each year

Answer 22

Based on percentage increase/decrease from last year.
Quick, sample but assumes conditions are the same.

Question 23

Zero-based budgeting, starting from scratch each year

Answer 23

Based on potential performance start £0, plan all year activity for source of finance.
More accurate than historical if done correctly.

Question 24

Fixed Budgeting

Answer 24

Stick to plans all year, prevents reacting to new threats.
Provides certainty, liquidity problems-controls cash flow

Question 25

Flexible Budgeting

Answer 25

Allows budgets to be altered to changes in market/economy.

Question 26

Zero-Based Budgeting

Answer 26

More flexibility than historical budgeting.

Question 27

Variance and Formula

Answer 27

Business performing worse or better than expected.
Actual Figure - Budgeted Figure

Question 28

Favourable Variance (Performing better)

Answer 28

Revenue or Profit is more than the budget say it’s going to be, costs below cost predictions.

Question 29

Adverse Variance (Performing worse)

Answer 29

Selling fewer items than income budget predicts, spending more on an advert.

Question 30

Cumulative Variance

Answer 30

Actual sales exceed budgeted sales (3,000) and expenditure on raw materials below budget (2,000) combined favourable variance (5,000). (3,000+(2,000)=(5,0000)

Question 31

Variance External Factors

Answer 31

Competitor behaviour, trends change increase/reduce demand.
Economy, workers wage.
Raw Materials Increase.

Question 32

Variance Internal Factors

Answer 32

Changing selling price changes revenue.
Improving efficiency.
Underestimate cost of change.

Question 33

Variance Analysis

Answer 33

Spotting variances, figuring out why they’ve happened then fix them.

Question 34

Small Variances

Answer 34

Motivate workers, catch up and fix it themselves.

Question 35

Large Variances

Answer 35

Demotivate workers, feel the tasks impossible, already failed.

Question 36

Businesses changing Variances

Answer 36

Not changing the budget too much.
Removes Certainty, removes benefits.
Workers less motivated, won’t try anymore.

Question 37

Decisions based on Favourable Variances

Answer 37

Set more ambitious targets next time.
Increased productivity, additional staff to meet demand.

Question 38

Decisions based on Adverse Variances

Answer 38

Cut costs, ask suppliers for better deals.
Additional Market Research, improve forecasts.
Updating product, attractive to customers.