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Finance D 76 > Unit 5 Budgeting > Flashcards

Unit 5 Budgeting Flashcards

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1
Q

3 uses for budgeting

A

Future Financing Needs - understanding cash flows helps estimate/negotiate financing needs
Corrective Action - knowing changes ahead of time allow time to adjust, improves credibility with lenders
Performance Evaluation - assess targets being met

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2
Q

6 principles to effective budgeting

A

Know yourself
know key savings, income, expenses
develop savings, income, expense strategies
keep records
use an appropriate method
eliminate consumer debt, minimize long term debt

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3
Q

3 steps to making a cash budget

A

Determine cash receipts (know income)
Estimate cash disbursements (know expenses)
Create the cash budget

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4
Q

5 steps to make personal budget

A 
Understand goals
track savings, income, expenses
develop cash budget (set aside money for savings)
implement plan
compare cash budget to spending
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5
Q

fixed expenditures vs variable expenditures

A

fixed expense - constant expense don’t have control over

variable expense - expense you have control over and varies from month to month

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6
Q

50/30/20

A

needs/wants/savings

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7
Q

Items in a cash budget

A 
Cash Receipts (income)
Cash Disbursements (expenses)
Borrowing (debt)
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8
Q

Why are sales not strictly considered to be the same thing as cash receipts?

A

Sales include both cash sales and credit sales.

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9
Q

Methods for tracking cash flows

A

Keeping records of cash flows
Envelope Method
Spreadsheet Method
Computer program

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10
Q

Steps to Monitoring cash flows

A

Making sure expenses are within budget
identify patterns and changes in cash flows
understand circumstances that need correction

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11
Q

Describe budget revision process.

A

Make changes to budget to reach goals.
Identify trouble areas.
Implement gradually.

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12
Q

What is Profit forecasting

A

projected earnings after subtracting costs

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13
Q

balance sheet forecasting

A

combine profit forecast and sales growth to make ‘pro forma’ balance sheet to understand future implications of financing strategies

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14
Q

2 things growth requires

A

increase in capital (inventory) and in fixed assets

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15
Q

DFN

A

discretionary financing needed
aka E(xternal)FN, A(dditonal)FN
How much financing will be needed given expectations in growth.

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16
Q

Budgeting vs Forecasting

A

Budget - detailed, Forecast broad
Budget - compare to actual, Forecast - no variance analysis
Budget - take action to adjust budget, Forecast - take action within company - credit standards, inventory holdings, etc.

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17
Q

Budget vs Forecast (2)

A

Budget - outline of direction mgmt wants to go

Forecast - is firm reaching budget goals, show where company is headed

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18
Q

spontaneous accounts

A 
those that vary naturally with sales 
Cash
Accounts Receivable
Inventory
Accounts Payable
Accrued Expenses
19
Q

discretionary accounts

A

opposite of spontaneous accounts

bank loans, bonds

20
Q

Percent of Sales Method

A

uses sales forecast and historical relationships between sales and other variables to create pro forma statements

21
Q

pro forma statement

A

statement that projects an estimate for future periods as if sales grow as predicted

22
Q

steps in percent of sales method

A

Project sales revenues and expenses
Forecast change in spontaneous balance sheet accounts
Deal with discretionary accounts
Estimate fixed asset account
Calculate retained earnings (RE)
Determine total financing need (projected total assets)
Calculate DFN

23
Q

How are spontaneous accounts affected by sales forecasts.

A

Sales increase leads to proportional change in current assets and current liabilities.

24
Q

What types of accounts are discretionary? How are they fed into Pct in Sales forecast?

A

Notes payable
long term financing accounts/debt
common stock
Keep them constant in estimate.

25
Q

Which 2 accounts are not spontaneous or Discretionary. How are they factored into Pct in Sales forecast?

A

Fixed Assets: Change in response to sales depends on how much change is needed. Can only buy 100% of a new factory or piece of machinery.
Retained Earnings

26
Q

Why are retained earnings not spontaneous or discretionary?

A

Depreciation expense:
Interest Expense
Dividends

27
Q

Projected RE formula

A

Old RE + (Projected Sales x Net Margin x Plowback ratio)

Net margin describes percent of sales left as net income

28
Q

Payout ratio

A

percent of net income given to shareholders

29
Q

Plowback ratio

A

aka retention ratio
1 - payout ratio
percent of net income retained in firm

30
Q

Balance sheet equation

A

Assets = Liabilities + Owner Equity

Projected Assets must equal projected financing (Liabilities + Equity)

31
Q

Formula for DFN.

A

Projected Total Assets - Projected Total Liabilities - Projected Owner Equity

32
Q

How to evaluate/use DFN

A

Negative DFN means no additional financing needed to fund projected sales. Positive DFN means more financing is needed.

33
Q

Plug

A

Account used to balance pro forma balance sheet

Discretionary ( up to mgmt what to use to balance pf sheet)

34
Q

How to forecast change in common assets and liabilities

A

Derive % of this year’s amount relative to sales

multiply % by projected sales to get projected amount of discretionary items for next year

35
Q

Retention Ratio

A

Plowback ratio

36
Q

SGR

A

Sustainable Growth Rate

allows firm to keep present financial ratios without issuing new equity

37
Q

Steady state growth

A 
growth where 
Profitability
Asset Utilization
Leverage
Payout
are constant
firm doesn't need to issue new equity to fund growth
38
Q

SGR formula

A

ROE x (1-b)
b is dividend payout ratio
1-b is plowback/retention ratio

39
Q

Why is keeping a high SGR a challenge?

A

As sales increase, market is saturated, meaning firm needs to offer new products or focus on products with lower profit margins.

40
Q

Ways to reduce DFN

A

Slow Sales Growth - increase prices
Examine Capacity Constraints - increase TAT (asset use efficiency)
Lower Dividend payout - increases retention ratio
Increase Net Margin - increases retention ratio

41
Q

Limitations on SGR

A

may need to keep prices low, lowering growth
may need to invest in new product development
poor forecasting and budgeting and planning

42
Q

sales capacity formula

A

actual sales/% capacity currently in use

43
Q

How to use sales capacity to determine if additional investment assets is needed.

A

if current sales x projected growth rate is less than capacity, additional investment in assets is not needed

Finance D 76 (5 decks)

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