Budgeting, Cash Flow, and Break-Even Analysis

This set of flashcards covers key concepts related to budgeting, cash flow management, break-even analysis, and sources of business finance.

What is the primary purpose of a budget in an enterprise?

To plan future expenditure and revenues to ensure profitability.

What is the capital expenditure budget used for?

It is reserved for fixed assets like large machinery or premises.

What does a labour budget account for?

The costs associated with paying employees and the amount of labour needed to achieve production or service goals.

What does a revenue or sales budget estimate?

The potential revenue an enterprise expects to generate over a specified period.

What is the purpose of a cash budget?

To monitor cash inflows and outflows and manage cash flow effectively.

What does a marketing budget estimate?

The costs required to promote the enterprise and its goods or services.

What is involved in budgetary control?

Regularly checking performance and spending against the budgetary plan.

What is meant by favourable variance in budgets?

When the actual budget result is better than expected.

What indicates an adverse variance in budgeting?

When actual results are worse than budgeted expectations.

What is a cash flow forecast?

A prediction of money inflows and outflows over a specific period.

Why are cash flow forecasts important for enterprises?

They help identify potential liquidity issues and allow for proactive financial planning.

What is the difference between predicted and actual cash inflows?

Predicted inflows are expectations based on previous data, while actual inflows are what the enterprise has actually received.

What do net inflows/outflows indicate?

Whether an enterprise has more cash coming in than going out.

Define cash surplus.

When total cash inflows exceed total cash outflows.

Define cash deficit.

When total cash outflows exceed total cash inflows.

What is the break-even point?

The level of sales at which total revenues equal total costs, resulting in neither profit nor loss.

How is the break-even point calculated?

Break-even point = Fixed costs ÷ (Selling price - Variable costs).

What does the margin of safety represent?

The difference between actual sales and break-even sales.

Why is it important to know the margin of safety?

It indicates how much sales can fall before the enterprise reaches a loss.

What is a key advantage of a mortgage?

A cost-effective way to borrow money for purchasing property.

What is one disadvantage of selling shares to raise finance?

It reduces the control and ownership of the original enterprise owners.

What are retained profits?

Profits reinvested back into the enterprise rather than distributed to owners.

Name a common external source of finance for enterprises.

Bank loans.

What is an advantage of leasing equipment?

It allows access to expensive equipment without the need to purchase it outright.

What is an advantage of a bank overdraft?

It provides quick and flexible access to finance.

What is an example of internal finance?

Using retained profits or savings.

Describe what constitutes fixed costs.

Costs that do not change regardless of the level of production, such as rent and salaries.

What does a cash flow statement provide?

An overview of actual cash inflows and outflows during a specified period.

What is the role of a cash budget in cash flow management?

To plan and monitor cash movement to prevent liquidity issues.

What might be a consequence of unfavorable variances in budgets?

Increased financial strain and the potential for loss.

What strategy can be used to address negative cash flow?

Selling unused assets, cutting costs, or seeking new revenue streams.

Why do enterprises conduct break-even analysis?

To determine the minimum sales volume required to avoid losses.

What impact does an increase in fixed costs have on the break-even point?

It raises the break-even point, requiring more sales to reach profitability.

What is trade credit?

A short-term financing option allowing purchase of goods and delaying payment.

What is crowdfunding?

Raising finance by soliciting small amounts of money from a large number of people.

How can an enterprise improve its cash flow?

By increasing revenues, reducing costs, and managing credit terms more effectively.

What should an enterprise consider when choosing a source of finance?

The amount needed, purpose of the finance, cost, duration, and repayment capabilities.

What is one limitation of break-even analysis?

It assumes all costs and sales prices remain constant.

What is a cash flow deficit?

A situation where cash outflows exceed cash inflows.

What can indicate potential cash flow problems for an enterprise?

Consistent cash flow deficits and increasing unpaid debts.

What role does market research play in budgeting?

It helps predict sales figures to create accurate revenue budgets.

What factors might limit a marketing budget?

Available funds, cost of promotional methods, and market conditions.

How can chasing debtors improve cash flow?

Ensures timely payments and boosts cash inflows.

What is the impact of poor cash flow management?

It can lead to inability to cover bills and operational challenges.

What does a company need to monitor after setting a budget?

Its performance against the budget to ensure targets are met.

Name a potential drawback of covenants in business loans.

It can limit operational flexibility and impose strict conditions on the enterprise.

What does liquidity refer to in a business context?

The availability of cash to meet immediate and short-term obligations.

How might an enterprise handle a predicted negative cash flow?

By reducing operational costs or postponing expenses.

List one reason for conducting cash flow forecasts regularly.

To facilitate better financial planning and decision-making.

What is the benefit of a detailed cash flow statement?

It provides insights into previous cash flow patterns for future predictions.

How is total revenue calculated?

By multiplying the number of units sold by the selling price per unit.

Why is it important for an enterprise to break even?

To ensure the sustainability of operations without incurring losses.

What could an enterprise do with a cash surplus?

Reinvest in growth opportunities or save for emergencies.

What do budgeting variances highlight?

Differences between planned and actual performance.

How does a negative cash flow impact operational decisions?

It may require cuts in spending or seeking additional financing.

What does the cost of goods sold (COGS) influence?

It directly impacts an enterprise's profitability analysis.

List one strategy to increase revenue.

Implementing sales promotions or increasing prices.

Why is proactive cash flow management crucial?

To avoid cash shortages that could threaten business operations.

What factors could cause fluctuations in cash flow?

Seasonal sales variations, changes in market conditions, and unexpected expenses.

What is one reason businesses prefer internal financing?

Lower costs compared to external financing options.

What does a decrease in variable costs achieve for an enterprise?

It can lower the break-even point and improve profitability.

How do supply chain issues impact cash flow?

They can lead to delays in product availability and revenue generation.

What financial risk does high debt introduce to an enterprise?

Increased payment obligations that can strain cash flow.

What is the importance of understanding fixed versus variable costs?

It aids in accurate budgeting and forecasting.

How can diversifying product lines impact cash flow?

It can provide additional revenue streams and reduce reliance on single products.