3.5.2 Flashcards
(17 cards)
What are budgets?
= A forward financial plan of income, expenditure and profits. It is used to provide a target and assess performance.
What are the three common types of budgets?
- Income
- Expenditure
- Profit
What is the 5 step process of budgeting?
- Business objectives
- Gather info
- Construct sales budget
- Construct expenditure budget
- Construct profit budget
What is variance analysis?
= The process of investigating any differences between forecast data and actual figures
What are the 2 types of variances?
- Favourable
- Adverse
How are variance analysis’s used?
- Spot trends
- Gain understanding of what went wrong in order to make corrective changes
List 2 pros and cons of budgeting
+ Plan ahead
+ Provides clear target
+ Prevent overspending
+ Used to assess performance
- Just an estimate
- Timely process
- Bias
- May need training
Why forecast cash flow for a business?
- Support loan applications
- Avoid unexpected cash flow crisis
- Manage seasonal demand
How is closing balance calculated?
Opening bal + net cash flow
How is net cash flow calculated?
Cash in - cash out
What is breakeven?
= When sales revenue and total costs are equal
What is breakeven analysis?
= A chart used to determine how much output is needed to breakeven
What are some uses for breakeven analysis?
- Can see how many products need to be sold
- Can make changes (eg lower costs)
- Make comparisons with competitors
- Help decide whether to go ahead with the business
- Support loan applications
What is contribution per unit?
Selling price - variable cost per unit
What is total contribution?
Contribution per unit x output
OR
Total sales revenue - total variable costs
What is the formula for breakeven?
Fixed costs / contribution per unit
What is the margin of safety?
The difference between the break even output and the current level of output
