Please enable JavaScript.
Coggle requires JavaScript to display documents.
Theme 2, Part 7 and 8- Financial Planning and Managing Finance - Coggle…
Theme 2, Part 7 and 8- Financial Planning and Managing Finance
Breakeven Point
-
Definition:
describes the position where a business is selling enough units to cover all costs, but isn't making a profit yet
-
Limitations:
- based on the business only selling one product
- assumes the business sells ALL the products
- variable costs may be different if the business buys in bulk
Contribution
Calculation:
(total)= total sales - total variable costs
(per unit)= selling price - variable cost per unit
-
-
Budgets
-
Historical Budget:
set using historical data as a guide for this years budgetsPros:
- realistic, based on real data
- quick and simple
Cons:
- assumes this year will be exactly the same as the last (covid)
- doesn't take into account trend or competitor changes
Zero Based Budget:
setting each budget to zero each year and expecting each department to justify their new budget figurePros:
- helps ensure departments are not overly funded
- allows management to focus on current figures
- can enable better communication within the business
Cons:
- timwe consuming
- doesn't make use of potentially helpful previous data
- doesn't guarantee cost saving
Variance Analysis:
calculating the accuracy of the budget by calculating the difference between the actual figure and the budgeted figure
-
Adverse Variance Analysis:
the actual figure was worse then the budgeted figure (bad for the business)
Favourable Variance Analysis:
the actual figutre was better than the budgeted figure (good for the business)
Limitations to Budgeting:
- time consuming
- finance orientated (profit tunnel vision)
- could be innacurate
- could lead to tensions between employees and managers if budgets aren't met or if the budgets are unrealistic
Profit
-
Types of Profit:
- Gross profit
- Operating profit
- Net profit
Gross Profit:
total revenue - cost of sales
a raw measure of profit that deducts the costs directly involved in making the product
Operating Profit:
gross profit - fixed costs
more accurate figure of the profit a business operation got before deducting tax and interest
Net Profit:
operating profit - interest and tax
final measurement of profit with all costs deducted, aka profit of the year
Improve Profit:
- increase revenue (increase selling price)
- reduce costs
(depends on PED)
