fgg Flashcards
(20 cards)
What is a Variance in Budgeting?
Difference between budgetd outcome and actual outcome
A budget is a forward financial plan of revenue and costs, therefore profit can be calculated
Purpouses of Budgets?
Forecasts Outocmes
Motivate’s staff due to this sense of control
Delegate without loss of control
Provides Direction or co ordination
Establishes priorities and sets targets
Monitors performance, control income and expenditure (funds the business spends)
What are the two budgeting methods?
Historical Budgeting - Base targets for costs or revenue on last year’s budget, maybe with adjustment
Zero Based Budgeting - Start from nothing and justify all spending in the context of objectives for the coming year
What are the two end results of variance?
Favourable Varience - Positive Impact on Profit (greater than expected)
Adverse Varience - Negative Impact on Profit (lower than expected)
What are the two key rules about Breakeven
Quantity or Volume of output, not value
Round up to next whole number
What is Breakeven and Margin of Safety?
Breakeven - Minimum volume of sales needed to cover all costs of production. Your break-even point is where your revenue covers your costs but nothing more. In other words, your business does not make a loss but it doesn’t make a profit either.
Margin of Safety - the difference between your gross revenue and your break-even point.
What is Contribution per Unit?
measures the amount of profit that a company generates from each unit of a product that it sells.
The selling price per unit minus variable cost per unit
On a chart, where does the breakeven level occur?
Where Revenue and Total costs meet as X
How to Calculate Breakeven?
Fixed Costs / (Sales Rev - Variable costs)
How to Calculate Margin of Safety?
(Current Sales Level - Breakeven Point / Current Sales Level) x 100
How to Calculate CPU?
Revenue per unit - Variable costs per unit
Calculate Gross Profit margin and Operating Profit Margin and Net Profit Margin?
(GPM - Revenue - Cost of Sales / Revenue) x 100
OPM - Operating Profit / Revenue x 100
NPM - Net Profit / Revenue x 100
What is a Balance Sheet?
a financial statement that contains details of a company’s assets or liabilities at a specific point in time
What is Liquidity?
The ability of a business to pay the bills it receives in the next 12 months
How to calculate current ratio and acid test ratio? ( the two liquidity ratios)
CR - CA / CL (current liabilities)
ATR - CA - Inventory / CL (Inventory is misused because it’s the least liquid, hardest to turn into cash
ATR’s are dangerous if the number is over 1
What are Pros and Cons of Internal Finance?
Pros: Capital is avadibile immediately, no need to wait
It’s cheap - no interest costs
No 3rd parties
No need for credit checks
Cons: Can be limited, may not have unwanted assets to sell
Can be inflexible compared to external
Opportunity cost for internal finance can be high
How to Calculate Net Cash Flow, Opening Balance and Closing Balance?
NCF - Cash in - cash out
OB - closing balance - net cash flow
CL - OB before it
What are uses of a Cash Flow Forecast?
Shows relationship between inflows and outflows - also analysing timings of in and out cash flows
Allows to plan the best time to release next product
Doesn’t account for political and economic situations
What are benefits and limitations of Sales Forcasting?
Businesses can see when to increase inventory - boosts customer satisfaction as they aee able to buy product accounting for factors like seasonality
Cannot predict wether customers will like the product. Inaccurate.
What is Limited and Unlimited Liability?
Limited - a business owner’s financial responsibility is restricted to the amount of money they have invested in the business. Their personal assets (like a house, car, or personal savings) are protected if the business incurs debt or is sued. This is common in LLC’s, Limited Partnerships). These have more access to different types of finance as they can raise capital through venture capitalists, equity finance (selling shares to investors), debt finance. These are PLC’s where shares are available to public. They can also be LTD’s.
Unlimited - the business owner is personally responsible for all of the business’s debts and obligations. Common in sole partnerships. These cannot be classified as a company. Usually rely on personal savings or family loans, bank loans are hard to get in these businesses.
