Theme 2.2 Financial Planning Flashcards
(27 cards)
What is a budget?
a financial plan that is agreed in advance - must not be a forecast.
It will show the money needed for spending and how this might be financed
4 types of budgets?
Sales volume
Production cost
Marketing
Total costs
What is an revenue (income) budget?
A target set for the amount of revenue to be achieved in a set period
What is a cost (expenditure) budget?
A limit placed on the amount to be spent in a given period of time
3 uses of budgets?
Helps establish priorities and set targets
Motivate staff as it encourages responsibility
Helps measure performance through variance analysis
What is a profit budget?
A target set for the surplus between revenue and costs in a given time period
How to construct a profit budget?
1) Analyse the market (market size, share, growth)
2) Draw up revenue budget (sales forecast, price changes)
3) Draw up cost budget (based on sales budget, allow for known changes in supplier prices)
2
3 limitations of budgets?
Time to complete and manage
Based on assumptions e.g. forecasts, if these assumptions are wrong for the upcoming year it will lead to misleading budgets
Can lead to manager avoiding creative ideas with a USP due to not having the budget -> not standing out in the market
What is historical budgeting?
A budget where the financial information used in a budget is based on past data
3 advantages of historical budgeting?
Realistic as its based on actual tests
The budget is stable and change is gradual
System is simple to operate and easy to understand
3 disadvantages of historical budgeting?
Assumes demand will remain the same as last year
Budget may no longer be accurate due to the level of activity or type of work being carried out
No incentives for reducing costs/developing new ideas
What is zero based budgeting?
A budget where each department is given no money until they can prove that the finance is needed
3 advantages of zero based budgeting?
cost efficiency - helps eliminate unnecessary costs
encourages responsibility of every department - greater motivation
better resource allocation - based on needs and priorities, ensures important projects receive the funding they need
disadvantages of zero based budgeting?
Time consuming for all departments
Complex inputting of information for manager, which could lead to errors
Managers may use bias to divert some funds to projects that they think are more important and need more investment over others
what is variance analysis?
calculating and investigating the differences between actual results and the budget
What is a variance?
a difference between actual figures and budget figures (can be favourable e.g. sales figures being higher than expected or adverse e.g. costs are higher than expected)
3 causes of favourable variances?
More demand than expected
Increase in selling prices
Cautious cost assumptions
3 possible causes of adverse variances?
Unexpected events lead to unpredicted costs
Less market demand/more competition
Overspend
once a variance has been identified, it is important to…?
identify the cause
consider the effect of it
look for a solution if possible
break even formula?
fixed costs/selling price per unit - variable cost per unit
Proift=?
total contribution - fixed costs
total contribution=?
contribution per unit x output
contribution per unit=?
Selling price - Variable cost per unit
