Financial Planning Flashcards

A CFO wants a budget that automatically adjusts expense allowances to actual sales volume. Which budget type fits best?

Answer: Flexible budget

A flexible budget recalculates costs for the actual activity level, which makes variance analysis meaningful.

Which approach requires every expense to be justified from scratch each planning cycle?

Answer: Zero-based budgeting

Zero-based budgeting starts each cost line at zero and requires a justification for each one.

A company always keeps a 12-month forecast horizon by adding a new month as each month ends. What is this called?

Answer: Rolling forecast

A rolling forecast keeps a constant forward horizon by adding a new period as each one closes.

In a master budget, which component is normally prepared first because the others depend on it?

Answer: Sales budget

The sales forecast drives production, purchasing, labor, overhead, and cash budgets.

Budgeted sales are 10,000 units, beginning finished goods are 1,500 units, and desired ending finished goods are 2,000 units. How many units must be produced?

Answer: 10,500

Production equals sales plus desired ending inventory minus beginning inventory: 10,000 + 2,000 − 1,500 = 10,500.

What is the main weakness of a top-down budgeting process?

Answer: It can lack buy-in from operating managers

Targets imposed by senior leadership may feel unrealistic to the managers who must deliver them, which weakens commitment.

Managers deliberately understate revenue and overstate expenses so their targets are easier to hit. What is this called?

Answer: Budgetary slack

Budgetary slack, also called padding, builds easy cushions into targets.

Which statement best describes the cash conversion cycle?

Answer: DIO + DSO − DPO

The cash conversion cycle equals days inventory outstanding plus days sales outstanding minus days payables outstanding.

A firm's DIO is 45 days, DSO is 40 days, and DPO is 30 days. What is its cash conversion cycle?

Answer: 55 days

45 + 40 − 30 = 55 days.

Which financing choice best matches the funding of a new 15-year manufacturing plant?

Answer: Long-term debt or equity

The matching principle pairs long-lived assets with long-term funding sources.

What does the sustainable growth rate measure?

Answer: The maximum growth without issuing new equity while keeping leverage constant

The sustainable growth rate equals ROE times the retention ratio, assuming constant leverage and no new equity.

ROE is 18% and the dividend payout ratio is 40%. What is the sustainable growth rate, using the simple formula?

Answer: 10.8%

SGR = ROE × retention = 18% × 0.60 = 10.8%.

In the percent-of-sales method, what does a positive external financing needed (EFN) figure indicate?

Answer: Projected asset growth exceeds spontaneous liabilities plus retained earnings

A positive EFN means the internal and spontaneous funding sources cannot cover the required asset growth.

Which item is generally treated as a spontaneous liability in financial forecasting?

Answer: Accounts payable

Accounts payable and accruals rise naturally with sales, without any new financing decision.

A CFO changes one input, such as price, at a time to see how NPV responds. What is this technique?

Answer: Sensitivity analysis

Sensitivity analysis isolates how a single variable affects the outcome.

Which technique runs thousands of iterations using probability distributions for several inputs?

Answer: Monte Carlo simulation

Monte Carlo simulation samples random input values repeatedly to build a distribution of outcomes.

Fixed costs are $600,000, the selling price is $50 per unit, and variable cost is $30 per unit. What is the break-even point in units?

Answer: 30,000

Break-even = $600,000 ÷ ($50 − $30) = 30,000 units.

Which planning tool links strategic objectives to financial, customer, internal process, and learning-and-growth measures?

Answer: Balanced scorecard

The Kaplan-Norton balanced scorecard translates strategy into measures across four perspectives.

Scenario analysis differs from sensitivity analysis mainly because it:

Answer: Changes several related inputs together to reflect a coherent future state

Scenarios such as base, best, and worst case move several assumptions together in a consistent way.

Driver-based planning builds forecasts mainly from:

Answer: Operational metrics that cause financial results

Driver-based models link financial outcomes to underlying operational drivers, such as headcount, units, or conversion rates.