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Financial Planning

Theme 2

QuestionAnswer
What is Break Even? Break-even is the point at which a business is not making a profit or a loss i.e. it is just breaking even
What is the Break Even Output? Break-even output is the number of items that a business must sell to reach this point
What is contribution used for? It has to firstly pay for its own variable costs and then contribute towards the fixed costs. Until there are enough contributions to cover all the fixed costs the business can not start to make a profit
What is contribution per unit? Contribution per unit is the difference between selling price per unit and variable cost per unit
What is total contribution? Total contribution is the difference between total sales revenue and total variable costs
What is the formula for contribution? Contribution = selling price – variable costs
What is the formula for Break Even? Fixed cost / contribution per unit = break-even point
What is the Margin of Safety? Margin of safety is how much actual output is above the break-even level of output
Why should Businesses treat break-even with a degree of caution? It is based on the assumption that costs and revenues will be static, in reality this is not true
Break Even can be affected by a change in fixed costs. Give three examples. Landlord puts rent up Bank changes interest rates Management want pay increase
Variable Costs changing can lead to the break even being inaccurate. State three examples. Raw materials change in price Minimum wage is increased Utility companies change price
What are the disadvantages of Break Even? Is based on predicted costs and revenues Even fixed costs can vary in reality Ignores changes in variable costs or selling price Only indicates the number of sales needed does not ensure actual sales will materialise
What are the advantages of Break Even? Can calculate the level of profit or loss at different levels Can predict the outcome of changing variables Provides a target An integral part of a business plan when seeking to secure finance Aids decision making
What are Budgets? Budgets are financial plans for a future period
How often are budgets drawn up? Budgets are usually drawn up on a monthly basis
What is the purpose of budgeting? Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured Helps with planning and forecasting to inform decision making Motivates budget holders due to increased responsibility
What is zero based budgeting? Setting a budget of zero All departments have to justify any requests for expenditure
What is Historical based budgeting? Setting budgets based on previous year’s Can be adjusted in line with actual outcomes e.g. if a budget was under spent should it be set lower this year?
What is a favourable variance? A favourable variance is one that is good for the business e.g. if income is higher than budgeted
What is an adverse variance? An adverse variance is one that is bad for the business e.g. when expenditure is higher than budgeted
What is a variance? Variance is the difference between the actual income, expenditure or profit and the figure that had been budgeted
What can cause a variance? Action of competitors Action of suppliers Changes in the economy Internal inefficiency
Problems of budgeting? Dependent upon predictions and forecasts Costs are subject to change Actions of competitors are unknown Managers may lack experience May be subject to bias Take time and effort which itself has an associated opportunity cost
What is sales forecasting? Sales forecasting is the predicting of future sales volume and trends
What is the purpose of sales forecasting? Inform cash-flow forecasts i.e. how much money can the business expect to flow in from sales Predict sales volume and sales revenue Assess ability to break-even Help set budgets
What factors affect sales forecasting? Consumer trends - Goods come in and out of fashion Difficult to predict what the next trend will be Shopping habits - Online sales e.g. how will this affect who buys what, where and when? Demographics -UK has an ageing population/high net migration
What economic variables affect sales forecasting? Interest rates - If interest rates are low this encourages consumers to spend Employment - The amount of people employed in an economy directly influences spending power, those in employment will have an income to purchase goods and services with
What are the problems of sales forecasting? By definition the future is unknown and therefore uncertain Changing external environment Unpredictable events Time frame Past is not a clear indication of the future Lack of perfect information
What is Sales Volume? Sales volume is the amount of sales expressed as a number of units sold
What is Sales revenue? Sales revenue is the amount of sales expressed as the total sum of money spent by consumers
What is the formula for Sales Volume? Sales revenue / selling price
What is the formula for Sales revenue? Selling price x quantity sold
What is revenue? Revenue is the money coming in from the sale of goods and services
What are variable costs? Variable costs change in relation to the number of items produced e.g. raw materials
How can total variable costs be calculated? Variable costs per unit are multiplied by the number of units to calculate total variable costs (TVC)
What is the formula for total costs? TC = FC + TVC
Created by: durquhart1