Financial Planning & Analysis Flashcards

A rolling forecast differs from a static annual budget primarily because it:

Answer: Extends continuously as each period passes, always covering a fixed horizon

A rolling forecast is updated regularly (e.g., monthly), always projecting the same number of months ahead, keeping the plan current.

What is the primary purpose of a cash flow forecast for a small business operator?

Answer: To anticipate periods of cash surplus or shortage and plan accordingly

A cash flow forecast helps operators identify potential shortfalls in advance so they can arrange financing or adjust spending before a crisis occurs.

Which of the following is an example of a capital expenditure (CapEx)?

Answer: Purchase of a delivery truck

Purchasing a delivery truck is a capital expenditure because it is a long-term asset that provides value over multiple periods.

A company's quick ratio is 0.8. What does this suggest?

Answer: The company may struggle to meet short-term obligations without selling inventory

A quick ratio below 1.0 means liquid assets (cash + receivables) are insufficient to cover current liabilities without liquidating inventory.

What does the term 'burn rate' refer to in financial planning?

Answer: The speed at which a company spends its cash reserves

Burn rate measures how quickly a company uses up its cash reserves, critical for startups and businesses in a cash-negative phase.

In a scenario where a business is considering dropping an unprofitable product line, which cost type should be ignored in the decision?

Answer: Sunk costs

Sunk costs are past expenditures that cannot be recovered and are irrelevant to future decisions.

A company's interest coverage ratio is 1.5. What does this indicate?

Answer: The company earns 1.5 times its interest expense in operating income, a thin margin

An interest coverage ratio of 1.5 means operating income is only 50% above interest obligations, which lenders typically consider a risky margin.