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RETURN ON
help a business stay p
measures how efficien
compares the return f
set ROI targets - high
RETURN ON INVESTMEN
ADVANTAGES DISADVANTAGES
Easy Assumes that variable costs
Quick - helps managers take action always rise steadily - bulk
quickly discounts are not direct
allows for forecasting how variances proportion REVENU
will effect finances and how much simple for a single product but Revenue O
needs to be sold to fix that not a portfolio of sales
help persuade the bank to give them a data wrong = results wrong Cost Obj
loan assumes the business sells all Profit Obj
influence decisions re new project products without waste increase
launches doesn't forecast sales achieving
profit objs
BREAK-EVEN CHARTS FINAN
show costs and revenue against output specific fin
used to see how costs and revenue vary with output period of
break-even output = where the revenue and costs lines cross set by fin
Margin of Safety = actual output - break-even output consistent
can take action to increase margin of safety by lowering costs or objectives
increasing revenue or lowering costs financial o
lower break-even output = bigger margin of safety coordinati
WHAT TO CONSIDER WHEN and allow
CHOOSING SOURCE OF FINANCE is a worth
CONTRIBUTION The legal structure of the
Contribution: the difference between the selling price of a BREAKEVEN business - sole traders can't sell
product and the variable costs needed to produce it The level of output at which total costs = sales shares
Used to help decide profitability; whether a business should accept an how much money is required -
CONTRIBUTION PER UNIT = selling price per unit - variable order; helps decide for one-off orders the more, the less likely for it to
costs per unit At the break-even point costs are equal to revenue WHY BUSINESSES NEED A SOURCE OF FINANCE be raised internally
sales below break-even point = business makes a loss for fixed assets, day to day costs risk level
Total Contribution = total revenue - total variable costs sales above breakeven point = business makes a profit internal and external sources of finances short-term or long-term need
Total Contribution = contribution per unit X no. of units sold new businesses should always do breakeven analysis to find the short-term - usually repaid within a year
breakeven point
contribution is used to pay fixed costs, what is left over is banks and venture capitalists need to see break-even analysis in the
profit business plan
breakeven output: where contribution is the same as fixed established businesses will need break-even analysis when launching
costs a new product CHOOSING SOURCES OF
shows how the launch will effect cash flow BREAK-EVEN ANALYSIS FINANCE
Break-even Output = fixed costs ÷ contribution per unit
VARIANCE
VARIANCES OFTEN = BAD EVEN IF FAVOURABLE Variance = the difference between actual and budgeted
all variances mean that something unexpected has spend
happened - need to know why the occur understanding variances helps managers make
5 - Financial De
must spot adverses ASAP and find out which budget decisions
holder is responsible Favourable Variance = increased profit ANALYSING BUDGETS
investigate favourable - may mean that the budget e.g. costs being below predictions or revenue being
targets need altering, made more difficult above
must understand what the favourable department did Adverse Variance = reduced profit
right and attempt to apply it to all areas e.g. selling less or spending more than predicted
Variance = budgeted prediction - actual amount
cumulative variance = variances added up
INTERNAL CAUSES OF VARIANCE
Improving efficiency = favourable variances EXTERNAL CAUSES OF VARIANCE
might overestimate the amount of money that can be Competitor behaviour & changing ZERO-BASED BUDGETING SETTING BUDGETS CASH FLOW FOREC
saved whilst streamlining production fashions - reduces demand developing budgets from scratch Budget - forecasts future spending and earnings, Cash flow forecasts show th
underestimate the cost of changes made Changes in the economy - effects start-up businesses have to use this method usually over 12mo in and out of the business ov
change in selling price since budget set wages can be hard as they don't have much info to base Income Budget - forecasts revenue, estimated used to ensure enough cash t
= internal variance suggests communication needs to be changing cost in raw materials decisions on using market research and last year's sales figures helps predict when cash is lo
improved likely to be inaccurate Expenditure Budget - predict total costs for the can identify if holding too mu
year, must base on sales estimates as it includes instead
Budget holders start with a budget of £0 and must variable costs established firms - forecast
REACTING TO VARIANCES get approval to spend money on activities Profit Budget: INCOME BUDGET - EXPENDITURE new firms - forecast must in
VARIANCE ANALYSIS can either change the budget to fit the plan the year's activities, ask for money and be BUDGET = expected profit or loss firms and customer trends sh
Identifying and explaining business or change the business to fit the prepared to justify requests - must be good
variances budget negotiators
small variances can motivate 3 Factors to consider before changing the budget takes longer than historical budgets
employees don't chop and change the budget too much if done properly, can be more accurate than AFFECTS ON THE BUSINESS
large variances are demotivating removes certainty historical budgeting NOT ALWA
more flexible than historical based budgeting expenditures are broken down into Can be based on false as
can be demotivating if they constantly change departments and allocated a budget Circumstances can sudde
budget holders - responsible for spending or machine breaks, competi
DECISIONS BASED ON ADVERSE generating money for each budget good cash flow forecasti
Change the marketing mix - cut price if DECISIONS BASED ON FAVOURABLE department budgets are broken up further into research into the market
demand is price elastic, update the product, set more optimistic and ambitious specific activities false forecast can cause
look for a new market or promotion strategy targets HISTORICAL BUDGETS - updated each year
streamlining production - efficiency reduces get everyone else doing the same as budget is based on a % increase or decrease from
costs the favourable department in terms of last year's budget
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