2.2 Financial Planning

Question 1

common problems with cash flow forecasts?

Answer 1

• sales prove to be lower than expected
• customers do not pay on time
• costs prove higher than expected
• imprudent cost assumptions

Question 2

purpose of sale forecasts

Answer 2

• see the size of the market
• see the volume of sales
• can see the difference of sales due to promotional activities

Question 3

factors affecting sales forecasts

Answer 3

• consuerl trends - seasonal factors, fashion
• economic variables, inflation, interest rates, economic growth , unemployment
• actions of competitors - short term i.e sales promotion, long term i.e product development and expansion plans

Question 4

sales revenue/ turnover equation

Answer 4

selling price x units sold

Question 5

what are variable costs/direct costs

Answer 5

costs that change in direct proportion to output
e.g raw materials

Question 6

what are fixed costs/ indirect overheads

Answer 6

costs that do not vary with output in the short term
e.g. rent, insurance

Question 7

what are semi variable costs

Answer 7

costs composed of a mixture of both fixed and variable components

Question 8

profit equation

Answer 8

(total revenue) - (total costs)

Question 9

what is break even

Answer 9

the point where a business is not making a profit/loss
TR = TC

Question 10

what is contribution and its equation

Answer 10

contribution per unit is the difference between the selling price per unit and variable costs per unit
selling price - variable costs

Question 11

what is total contribution

Answer 11

difference between total sales and total variable costs

Question 12

equation for break even point

Answer 12

fixed costs/ contribution per unit

Question 13

limitations of break-even analysis

Answer 13

• not useful for multiple products
• assumes all output is sold
• not easy to amend when conditions change i.e. costs
• revenue + total costs, do not have a linear relationship with output

Question 14

margin of safety equation

Answer 14

actual sales - break even point

Question 15

difference between long run costs and short run costs

Answer 15

in LRC all the factors of production are variable whereas in SRC at least one factor of production is fixed

Question 16

Break even charts

Answer 16

An alternative to calculating break even via contribution is to plot the lines on a break even chart

Question 17

definition of profit

Answer 17

the reward or return for taking risks and making investments

Question 18

equation for gross profit

Answer 18

revenue - cost of sales

Question 19

equation fro gross profit margin

Answer 19

gross profit / sales revenue x100

Question 20

equatino for operating profit

Answer 20

gross profit - expenses & overheads

Question 21

operating profit margin

Answer 21

operating profit / sales revenue x100

Question 22

what is the profitability ratio?

Answer 22

assess the returns earned by a business from its trading activities and investments

Question 23

Net profit equation

Answer 23

Operating profit - (finance expenses - tax)

Question 24

Net profit margin equation

Answer 24

Net profit / sales revenue x 100

Question 25

What is a balance sheet/ statement of financial position?

Answer 25

Shows the financial position of a firm on a given day. What it owns (assets) and owes (liabilities). It’s a snapshot of the business and is used by investors to see if its worth investing in

Question 26

What are non-current assets?

Answer 26

Create revenue and allows them to make profits, like to be kept by the business for more than one year E.g. vehicles, machinery

Question 27

What are current assets?

Answer 27

assets a business owns which are either cash, or will be turned to cash within a year. E.g. inventories (stocks), receivables (debts)

Question 28

What are liabilities

Answer 28

Money a business owes E.g. debt

Question 29

What are current liabilities

Answer 29

Debt the business will pay within a year E.g. overdrafts, payable, tax

Question 30

What are non-current liabilities

Answer 30

Debts that the business has more than one year to repay E.g. bank loan, mortgages

Question 31

Liquidity ratios definition

Answer 31

Assess whether a business has sufficient cash or cash equivalent current assets to be able to pay its debts as they fall due (2dp)

Question 32

Current ratio equation

Answer 32

Current assets / current liabilities

Question 33

Current ratio results

Answer 33

- ratio of 1.5-2 suggests efficient magnament of working capital - low ratio, below 1, indicates cash problems - high ratio: too much working capital?

Question 34

What to look out for in current ratios

Answer 34

- industry forms (e.g. supermarkets operate with low current ratios because they are low debtors) - tread (change in ratio) is perhaps most important

Question 35

The acid test ratios

Answer 35

(Current assets - stocks) / current liabilities

Question 36

Interpreting acid test ratio

Answer 36

- less than 1 is often bad news - trend: significant deterioration in the ratio can indicate a liquidity problem.

Question 37

Definition of budgets

Answer 37

A plan that shows you how to spend your money monthly

Question 38

What is the purpose of a budget?

Answer 38

To create financial stability

Question 39

What information do firms use for setting budgets?

Answer 39

- Historical information - Business plan - Changes in operations

Question 40

What are the different types of budgets?

Answer 40

- Historical figure budgets - Zero-based budgeting

Question 41

What is historical figure budgets?

Answer 41

Usually based on historical data (e.g. Sales and costs data from previous years.) and allow for factors, such as inflation and other relevant economic indicators.

Question 42

What is zero-based budgeting?

Answer 42

Some businesses make the decision not to allocate budgets on users zero budgeting approach. This is useful when is business needs to control costs closely zero budgeting requires all spending to be justified.

Question 43

What is an adverse variance?

Answer 43

When costs are higher/revenue is lower than the budget

Question 44

What is a favourable variance?

Answer 44

When the cost to produce something is less than the budgeted cost

Question 45

what is the equation for return on capital employed

Answer 45

operating profit / capital employer x 100