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FSM
Finance Skills for Managers Unit 4
| Question | Answer |
|---|---|
| What is the main purpose of budgeting? | To achieve financial goals by providing a structured financial plan. |
| How does budgeting differ for businesses vs. individuals? | Businesses aim to maximize owner wealth; individuals aim to maximize personal utility and financial accountability. |
| What is a cash budget? | A short-term financial forecast estimating expected cash inflows and outflows, typically for 1 month to 1 year. |
| Name three major uses of cash budgeting. | 1) Predict future financing needs, 2) Enable corrective action, 3) Performance evaluation. |
| How does a cash budget help in financing? | It identifies potential cash shortfalls early, helping secure loans or credit with better terms. |
| What role does corrective action play in budgeting? | It compares actual results to forecasts and allows early intervention to fix issues. |
| What are six principles of effective personal budgeting? | 1) Know yourself, 2) Understand savings/income/expenses, 3) Develop smart strategies, 4) Keep records, 5) Use a budgeting method that works for you, 6) Eliminate consumer debt. |
| Why is it important to “know yourself” in budgeting? | To clarify your goals, values, and sacrifices you’re willing to make to achieve financial success. |
| What does “develop smart strategies” mean for budgeting? | Saving a set portion of income, increasing earnings, and reducing non-essential expenses. |
| How can keeping records help with budgeting? | It provides accurate data for tracking spending patterns and aids tax preparation. |
| What’s a key benefit of eliminating consumer debt? | Avoiding high-interest payments and redirecting money toward savings and growth. |
| How does budgeting help with planning based on past performance? | By reviewing historical data to inform future budgets and adjusting for growth or obligations. |
| How can businesses use budgeting to take corrective action? | By shifting resources or revising goals when overspending or shortfalls occur. |
| What does tracking progress in budgeting involve? | Monitoring financial goals and evaluating performance against planned outcomes. |
| Why is budgeting considered a strategic planning tool? | It guides smarter decisions and prepares individuals and businesses for future financial events. |
| When evaluating a company’s performance, what can variances on a company’s cash budget indicate? | Variances show that certain managers or divisions are not meeting targets. |
| How far into the future do cash budgets usually forecast? | Between one month and one year |
| What are three principles of budgeting that are important to know before beginning the budgeting process? | Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives |
| What are the three main uses of cash budgets? | Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. |
| What is the purpose of creating a cash budget? | To manage cash flow, avoid shortfalls, and ensure funds are available for goals and obligations. |
| What are the three key steps in creating a business cash budget? | 1) Determine cash receipts, 2) Estimate cash disbursements, 3) Create the cash budget. |
| What should you include when determining cash receipts? | All sources of cash inflow like sales, loans, and investments, with timing and amount. |
| Why is understanding cash inflows important in business? | It ensures enough cash is available to cover operations, inventory, and supply purchases. |
| What are common examples of cash disbursements in a business? | Rent, payroll, utilities, supplies, and other operating expenses. |
| What formula is used to create a cash budget? | Beginning Cash + Cash Inflows – Cash Outflows = Ending Cash Position |
| What does a negative ending cash balance indicate? | The business may need short-term financing. |
| What are the five steps in personal cash budgeting? | 1) Understand your goals, 2) Track income, savings, and expenses, 3) Develop a plan, 4) Implement the plan, 5) Compare and adjust. |
| Why is setting personal financial goals important? | Goals guide spending, saving decisions, and overall financial planning. |
| What is the smart formula for personal cash budgeting? | Income – Savings – Expenses = Remaining Cash |
| What should you prioritize in your personal cash budget? | Prioritize saving first to stay on track with long-term goals. |
| What is the 50/30/20 budgeting rule? | 50% for needs, 30% for wants, and 20% for savings. |
| What is customized budgeting? | Adapting budget categories and percentages to fit personal goals and lifestyle. |
| What tools can help track personal finances? | Mint, Quicken, and similar budgeting apps. |
| Why should you not reduce savings goals during budget adjustments? | Savings goals are key to long-term success and financial stability. |
| What is net cash flow? | Net Cash Flow = Cash Inflows – Cash Outflows |
| How do you calculate ending cash balance? | Ending Cash Balance = Beginning Cash + Net Cash Flow |
| What is the correct order of the three steps necessary to create a cash budget? | Determine cash receipts, estimate cash disbursements, create the cash budget |
| Why is “put $50 in a savings account each month for Christmas gifts” a better budgeting goal than “save money for Christmas gifts”? | Because it is specific and measurable |
| Why would a monthly mortgage payment be considered a fixed expense? | Because the payment is the same amount each month |
| Which action would help you make your budget more efficient? | Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. |
| What is the main focus of a cash budget? | Short-term cash flow—tracking what's coming in and going out. |
| What are the three main items included in a business cash budget? | Cash receipts, cash disbursements, and borrowing/repayment. |
| What are cash receipts in a business context? | Cash from sales and collections from accounts receivable. |
| Why aren’t all sales immediately considered cash receipts? | Some sales are made on credit and collected in future months. |
| What are cash disbursements in a business budget? | Payments for inventory, wages, rent, utilities, taxes, and other expenses. |
| When does borrowing occur in a cash budget? | When available cash falls below the minimum required balance. |
| What happens when a company has more cash than needed? | It can repay debt or invest the surplus. |
| In personal budgeting, what are the three main steps? | Estimate income, estimate expenses, calculate net cash flow and plan. |
| What is an example of a cash receipt in a personal budget? | A $100 graduation gift from your grandmother. |
| What is an example of a business cash disbursement? | A rent check paid and cashed for a warehouse. |
| Why are sales not the same as cash receipts? | Because sales may include credit sales that are not yet collected. |
| What types of expenses are considered business cash disbursements? | Raw materials, rent, admin expenses, interest, and selling expenses. |
| What’s the formula to calculate net cash flow in a cash budget? | Net Cash Flow = Cash Receipts – Cash Disbursements. |
| How do you determine available cash? | Add beginning cash balance to net cash flow. |
| What’s the purpose of setting a minimum cash balance? | To ensure funds are available for essential operations and emergencies. |
| Which item is an example of a cash receipt in a personal budget? | A graduation gift of $100 from your grandmother |
| Which item represents an example of a cash disbursement a business might have this month? | A rent check paid and cashed for the warehouse the company uses |
| What three things should be included in a cash budget for a business? | Cash receipts, cash disbursements, and borrowing |
| Which items are considered cash disbursements for a business? | Raw materials, rent, administrative expenses, interest, and selling expenses |
| Why are sales not strictly considered to be the same thing as cash receipts? | Sales include both cash sales and credit sales. |
| Why are tracking, monitoring, and revising essential in budgeting? | They ensure you know where money is going, stay on target, and keep the budget realistic and aligned with goals. |
| What does tracking a budget involve? | Regularly recording all cash inflows and outflows accurately. |
| Name three common methods to track expenses. | Envelope Method, Spreadsheet Method, Budgeting Apps & Software (e.g., Mint, YNAB, Quicken). |
| What is the Envelope Method of tracking expenses? | Allocating cash for spending categories in envelopes; spending stops when the cash runs out. |
| What does monitoring your budget mean? | Reviewing tracked data to compare actual spending against the budget and identify patterns or problems. |
| How does monitoring help in budgeting? | It spots issues early and helps decide if adjustments are needed. |
| What is involved in revising a budget? | Adjusting the budget based on monitoring insights to fix overspending, reallocate funds, or plan for changes. |
| Why should budget revisions be gradual and prioritized? | To minimize disruption and allow time for adaptation. |
| What are some reasons to revise a budget? | Overspending, lower income or sales, unexpected costs, or seasonal changes. |
| Why is continuous revision important? | It maintains financial control and helps meet financial goals despite changing circumstances. |
| What is a key takeaway about budgets from this lesson? | Budgets rarely go exactly as planned, so ongoing tracking, monitoring, and revising are critical. |
| What role does tracking play versus monitoring? | Tracking records what actually happens; monitoring evaluates if the budget meets goals. |
| When should revising a budget occur? | Whenever circumstances change, either throughout the year or when planning ahead. |
| What is the main reason why it is important to track and record cash flows? | Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed. |
| In what situation might the software method of tracking be preferable to the spreadsheet method of tracking? | When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases |
| What is the purpose of monitoring your cash flows? | Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. |
| Which processes help you identify and fix problems in your budget? | Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. |
| What is the main purpose of financial forecasting? | To predict future performance beyond historical data for better investment, financing, and operational decisions. |
| Name the two key types of forecasts in financial forecasting. | Profit Forecast and Balance Sheet Forecast. |
| What does a profit forecast project? | Future earnings by subtracting estimated costs from projected sales. |
| What influences a profit forecast? | Changes in production/service costs, depreciation methods, and tax policies. |
| What is a balance sheet forecast? | A pro forma balance sheet showing potential changes in financial position based on sales and profit forecasts. |
| Why is forecasting financing needs important? | Growth requires more assets and therefore more financing; forecasting estimates how much extra funding is needed. |
| What are other names for Discretionary Financing Needed (DFN)? | External Financing Needed (EFN) or Additional Funds Needed (AFN). |
| What key assumptions are made in financial forecasting? | Future sales levels, sales-assets relationship, expected profitability. |
| What does “Garbage In, Garbage Out” (GIGO) mean in forecasting? | Forecast accuracy depends on the quality of input data—poor inputs lead to poor forecasts. |
| How does forecasting differ from budgeting? | Budgeting sets goals and plans; forecasting estimates likely future performance and guides decisions based on probable outcomes. |
| Can forecasts be revised like budgets? | Forecasts are generally not revised or compared to actual results, unlike budgets. |
| Why are forecasts important despite uncertainty? | They reduce mistakes and support better decision-making by combining data with reasonable assumptions. |
| How do the benefits of knowing the cash position for each period differ between businesses and individuals? | Knowing the cash position allows businesses to recognize when short-term loans are needed, while it allows individuals to analyze progress toward their personal financial goals. |
| What is the difference between tracking and monitoring cash flows? | Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed. |
| What role does financial forecasting play in the future success and growth of a firm? | Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. |
| What is the goal of financial forecasting? | To understand the implications of today’s decisions on tomorrow’s performance |
| Which question is answered by financial forecasting? | How much financing will the firm need in the future? |
| How does financial forecasting help with financial decision-making? | It helps decision makers understand the impacts of today’s actions on the future performance of the firm. |
| What is the main objective of financial planning in a business? | To guide investment and financing decisions that maximize owner wealth. |
| Why is understanding the link between asset requirements and sales growth important? | It helps predict future cash needs and determine funding strategies for growth. |
| What do good financial models help reveal? | Hidden relationships between business decisions and outcomes, such as costs, financing needs, and tax effects. |
| What is a spontaneous account? | An account that automatically changes with sales. |
| Name examples of spontaneous accounts. | Accounts receivable, inventory, accounts payable, and cash. |
| Why are spontaneous accounts important in financial planning? | They indicate increased working capital needs as sales grow. |
| What is a discretionary account? | An account that does not automatically change with sales; it is managed by decision-makers. |
| Name examples of discretionary accounts. | Bank loans, bonds payable, and new equity issuance. |
| Why are discretionary accounts significant? | They require active management decisions to fund future growth. |
| How does financial planning help with external funding needs? | It identifies whether and how much discretionary financing (like loans or equity) is needed for growth. |
| What is one of the fundamental purposes of financial forecasting? | To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm |
| What are spontaneous accounts? | Accounts that vary naturally with sales |
| Which type of account changes with sales growth? | Spontaneous accounts |
| If a company expects sales to grow by 10% next year, which account might also increase by 10%? | Cost of goods sold |
| What is the purpose of the Percent of Sales Method? | To forecast financial statements and calculate Discretionary Financing Needed (DFN) based on projected sales growth. |
| What is Discretionary Financing Needed (DFN)? | The amount of external financing required when projected assets exceed liabilities and equity. |
| What is the formula for DFN? | DFN = Projected Total Assets − Projected Total Liabilities − Projected Equity |
| What are spontaneous accounts? | Balance sheet items that change automatically with sales (e.g., cash, A/R, inventory, A/P). |
| What are discretionary accounts? | Accounts that require managerial decisions to change (e.g., debt, equity). |
| What is the plowback ratio? | The portion of net income retained in the business, calculated as (1 - payout ratio). |
| How do you forecast a spontaneous account? | Multiply its historical percentage of sales by projected sales. |
| Why don’t fixed assets increase proportionally with sales? | They require large, lumpy investments rather than scaling smoothly. |
| What formula is used to estimate projected retained earnings? | Projected RE = Old RE + (Projected Sales × Net Margin × Plowback Ratio) |
| In the B&H example, what was the sales increase from 20X7 to 20X8? | $32M to $40M, which is a 25% increase. |
| How much was B&H’s fixed asset investment for growth? | $2 million |
| What was B&H’s projected total assets in 20X8? | $28 million |
| What was B&H’s projected total liabilities and equity? | $27 million |
| What is B&H’s calculated DFN for 20X8? | $1 million |
| What does a positive DFN indicate? | The company needs to raise external financing. |
| When can the discretionary financing needed (DFN) be determined? | After pro-forma financial statements are forecasted using the percent of sales method |
| Which action decreases the discretionary financing needed (DFN)? | Increasing the plowback ratio |
| You are a financial manager of a company, and you have projected sales increase for next year of 8%. Which action would you take when you conduct financial forecasting using the percent of sales method? | Leave the notes payable account constant in the projected financial statements. |
| You are conducting financial forecasting for your firm given the projected sales. What are you doing if you are estimating changes in the balance sheet based on the predicted change in sales? | Forecasting spontaneous accounts |
| What is the Sustainable Growth Rate (SGR)? | The maximum rate at which a firm can grow without issuing new equity while maintaining current financial ratios. |
| What is the basic formula for SGR? | SGR = ROE × (1 − b), where b is the dividend payout ratio. |
| What does (1 − b) represent in the SGR formula? | The retention ratio, or plowback ratio — the portion of earnings retained in the business. |
| What is the expanded SGR formula using the DuPont model? | SGR = Net Margin × Asset Turnover × Leverage × (1 − b) |
| In the B&H example, what is the calculated SGR? | SGR = ($1.6M ÷ $9M) × (1 − 0.50) = 8.89% |
| Why did B&H’s 25% sales growth lead to a DFN? | Because it exceeded their SGR of 8.89%, creating a funding shortfall of $1M. |
| What are four ways to reduce DFN? | Slow sales growth Examine capacity constraints Lower dividend payout Increase net margin |
| How can slowing sales growth reduce DFN? | It reduces the need for additional assets and increases retained earnings if margins improve. |
| How does evaluating capacity constraints help? | It may reveal alternatives to major asset purchases, improving asset turnover and reducing financing needs. |
| What is the impact of lowering the dividend payout? | It increases the retention ratio, leaving more income for reinvestment — but may upset shareholders. |
| How can a company increase its net margin? | By raising prices, cutting costs, or leveraging economies of scale. |
| What are two limitations of the SGR concept? | External factors (market changes, economic shifts) Internal issues (planning errors, capital investment needs) |
| Why is the Percent of Sales method limited? | It’s too flexible and doesn’t account for realistic financial relationships or strategic constraints. |
| What should real-world forecasting include? | Financing capacity Asset constraints Dividend policies Strategic integration |
| Why is the DuPont formula valuable in calculating SGR? | It integrates profitability, efficiency, and leverage into the growth forecast. |
| What is the key takeaway about forecasting and SGR? | Strategic, integrated planning is crucial — SGR is a tool, not a hard cap. |
| What is the sustainable growth rate (SGR)? | The growth rate that allows a firm to maintain its present financial ratios without issuing new equity |
| How can a company reduce its discretionary financing needed (DFN)? | Increase the net margin. |
| Which action increases a company’s sustainable growth rate (SGR)? | Decreasing dividend payout |
| Which account should be looked at first when examining capacity constraints to determine whether the discretionary financing needed (DFN) can be reduced? | Fixed assets |
| Why are fixed assets treated differently from other accounts in forecasting? | Because fixed assets are “lumpy” and must be purchased in large discrete amounts, not fractional percentages. |
| Can fixed assets scale linearly with sales growth? | No, fixed assets only increase when current capacity is fully utilized. |
| What does “lumpy assets” mean? | It means fixed assets must be bought as whole units (e.g., entire buildings), not in fractional parts. |
| What is the formula to calculate sales capacity? | Sales Capacity = Actual Sales ÷ Capacity Utilization Rate |
| Example: If actual sales are $240 million and capacity utilization is 80%, what is the sales capacity? | Sales Capacity = $240M ÷ 0.80 = $300 million |
| If projected sales are $264 million with a $300 million capacity, is new fixed asset investment needed? | No, because $264M is within the $300M sales capacity. |
| If projected sales are $312 million but capacity is $300 million, what should the firm do? | Invest in new fixed assets to increase capacity. |
| How does considering fixed asset capacity improve DFN calculations? | It avoids overestimating financing needs by only accounting for actual capacity constraints. |
| What is the impact of ignoring fixed asset lumpiness in forecasting? | It can lead to unrealistic assumptions about asset growth and incorrect financing requirements. |
| Why is timing important when planning fixed asset investments? | Proper timing ensures assets are available when needed to meet production demand without unnecessary early expenditures. |
| How can a firm grow its fixed assets if it is expecting growth but has reached capacity with its fixed assets? | Invest a substantial amount of money at one time to increase capacity. |
| What does the sales capacity equation tell you? | How much room a firm has to grow without additional investment in fixed assets |
| What is discretionary financing needed (DFN)? | The additional financing needed given a firm’s expected future growth |
| You are a financial manager of a company. The marketing department has informed you that the projected sales growth for the upcoming year is 10%. As you conduct financial forecasting, you keep the long-term liabilities the same amount as the previous year | Discretionary account |
| What does the discretionary financing needed (DFN) tell us? | The total amount of funding that management will need to obtain through discretionary financing sources |
| Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company’s leadership the fastest that ABC can grow? | Sustainable growth rate |
| What is the name for a forecast of short-term events that helps a company understand if it has sufficient cash? | Cash budget |
| What is the purpose of a monthly cash budget? | To control cash inflows and outflows so you can balance income with expenditures and savings |
| In which situation would a firm need to borrow cash? | When the beginning cash balance plus the net cash is less than the minimum cash balance required for the month |
| How can you use the envelope method of budgeting to monitor cash flows? | Put the amount of money budgeted for each category of your expenses into labeled envelopes and then spend the money in each envelope on expenses in that category. |
| How should you go about making changes to your budget? | Prioritize the changes you want to make and then implement them gradually one by one to make sure they work. |
| You are a financial manager of a company. The marketing department has informed you that the projected sales growth for the upcoming year is 15%. As you conduct financial forecasting, you increase cash, accounts receivable, and inventory accounts by 15%—t | Spontaneous accounts |
| What does it mean when a firm’s calculated discretionary financing needed (DFN) is negative? | The firm will have enough financing to fund projected sales. |
| Which account is a spontaneous account? | Accounts payable |
| Why is the sustainable growth rate (SGR) useful? | It gives the maximum growth rate that allows a firm to maintain its current financial ratios without issuing new equity. |
| You are analyzing fixed assets to create pro forma financial statements for your company. You realize that, since sales will increase next year, you will also need your manufacturing capacity to increase by the same amount. Currently, you are operating | Fixed assets are lumpy. |
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