2.2 Financial Planning

Question 1

What are the purposes of sales forecasts?

Answer 1

Marketing planning
HR planning
Financial planning
Production or operations planning

Question 2

What three factors affecting sales forecasts that make them difficult?

Answer 2

Consumer trends
Economic variables
Competitors’ actions

Question 3

What is the formula for sales revenue?

Answer 3

Revenue = units sold x sales price

Question 4

What are variable costs?

Answer 4

Costs that vary directly with the level of output

Question 5

What are fixed costs?

Answer 5

Costs that do not change as a result of output changes

Question 6

What is the break-even point?

Answer 6

The point at which enough money is generated from sales to cover the costs of the business.

Question 7

What is the formula for contribution?

Answer 7

Contribution = sales revenue - variable costs
or
Contribution = unit contribution x output

Question 8

What is the formula for unit contribution?

Answer 8

Unit contribution = sales price per unit - variable cost per unit

Question 9

What is the margin of safety?

Answer 9

The difference between a business’s actual output and its breakeven output

Question 10

What are the benefits of breakeven analysis?

Answer 10

Quick and easy
Useful for new businesses/start ups
Supports loan application
Measure profit and loss
Models ‘what if?’ scenarios

Question 11

What are the limitations of breakeven analysis?

Answer 11

No costs are truly fixed
The analysis is only as good as the information provided
Sales revenue assumes all output is sold at uniform price
Total cost ignores bulk-buying discounts

Question 12

What are the purposes of budgets?

Answer 12

Target for entrepreneurs and managers
Basis for later assessments of performance
Motivational for budget holders
Help with pricing

Question 13

What are the two types of budget?

Answer 13

Historical
Zero-based

Question 14

What is a historical budget?

Answer 14

A financial plan that uses the previous year as a guide

Question 15

What is a zero-based budget?

Answer 15

A financial plan that starts afresh each year with the budget holder justifying all spending

Question 16

What is a favourable variance?

Answer 16

When costs are lower than forecast or profit and revenue is higher than anticipated

Question 17

What is an adverse variance?

Answer 17

When costs are higher than expected or revenues are lower than anticipated

Question 18

What are the three stages in the process of setting budgets?

Answer 18

Prepare income budgets
Construct expenditure budgets
Forecast profit/loss through comparison of the two

Question 19

What can favourable variance lead to?

Answer 19

Increased production if prices are rising
Reduced prices if costs are below expectations
Reinvestment in the business or higher dividend payments

Question 20

What can adverse variance lead to?

Answer 20

Cost reductions
Increase advertising to increase sales
Reduce prices to increase sales (dependent on PED)

Question 21

What are the difficulties of budgeting?

Answer 21

Lack of data
Forecasting costs can be problematic
Competitors actions may negate data used
Difficulties agreeing with budget holders
Lack of understanding of causes of variances