Managing Financial Resources: Fixed and Variable Components, Budgeting and Forecasting, Variance Analysis, and Performance Metrics

This article discusses managing financial resources, including fixed and variable components, budgeting and forecasting, variance analysis, and performance metrics. It covers advantages and disadvantages of each component, and provides examples and calculations. The article also emphasizes the importance of customer satisfaction in predicting business revenue and growth.

Managing Financial
Resources

TABLE OF CONTENTS
SECTION A ....................................................................................................................................3
Question 2 ..................................................................................................................................3
SECTION B ...................................................................................................................................5
Question 4 ..................................................................................................................................5
Question 5...................................................................................................................................6
REFERENCES..............................................................................................................................10

SECTION A
Question 2
Fixed components- This is the cost which does not get impacted with decrease or increase in the
number of products or services which has been sold or produced by firm. Fixed cost is known as
expenses that a firm must pay against any business related activities(Li, F., Zhu, Q. and Liang,
L., 2018). Hence, the company set these costs over a specified period of time and therefore do
not change with level of production.
Advantages- It is easier to account for this cost because fixed cost does not change and
affected by increase or decrease in the services or products. It does not change in line with the
goods sold or produced volume. This will ultimately encourage team members of production
department to produce more effectively. This cost is helpful for cash savings because it decreases
the net income of a company for the accounting period that results in tax liability reduction.
Disadvantages- sometimes fixed cost is very tough because when company is into
multiple products or services, it is difficult to find any direct relationship between the fixed costs
and goods. Hence, it will result in wrong financial productivity measurement which can impact
profit margins.
Variable components- It is an expense in corporate that changes in proportion to how much a
firm sells or produces their services or products(Casazza, M., 2019). The result of variable cost
means decrease or increase is totally depended on a firm's sales volume or production. For
example- variable costs increase when the production increase and it reduced as production
decline. Example includes cost of raw materials which is used in production, direct labor costs
and commission with respect to sales.
In order to calculate total variable costs, the company needs to multiply the total number
of units produced by the variable cost per unit.
Total variable cost= per unit variable cost* quantity of units produced
Advantages- financial planning requires managers to estimates future costs and
production. Variable cost is essential for making accurate cost estimation so that company can
easily determine the expenditure level at various production levels and cost behaviour
knowledge. It is helpful to make short term controlling, decision-making process and controlling.

Managers can find out important and necessary information through variable costing. Managers
of the company requires skills and knowledge of cost behaviour under different category of
operating conditions and decisions about business. Also, the management team can make product
pricing decisions. Here, they have detailed data to determine when it is advisable to accept the
orders related to business . It is helpful to purpose of cost controlling process, in the company
costs should be split into variable and fixed costs. It supports the standard use, responsibility
reporting and budgeting control to help management team. The income statement of variable
costs highlights the relationship between income and sales. It shows an increase in income
statement corresponding to the sales performance.
Disadvantage- sometimes variable costing mislead managers during their decision-
making process when a business is facing recession, during which profit will be minimized due
to sales being lower than production of product or services.
The Cleveland recreation centre is planning its annual fundraiser.
Budget for the event includes-
Ballroom rental £2900
Entertainment £4500
Printing £600+ £9 per guest
Food £29 per guest
Decorations and favours £700+ £5 per guest
(a) fixed components= ballroom rental+entertainment+printing+decorations
£2900
£4500
£600
£700
Total = £8700
Variable components= £9+£29+£5

=£43
(b)
If Cleveland recreation centre charges £100 per person, then money will be raised by this event=
=(£100×£3000)-[£8700+(£43×£3000)]
=£300000-(£8700+£129000)
=£300000-£137700
= £162300
For fixed cost, total number of expenses has been added that is £8700, for variable cost
total number of per guest has been added that is £43.
By evaluating the study, it has been determined that if committee expects that total
number of people that is £3000 will attend the event, and they will charge £100 per person= total
300000.
Number of total people that is £3000 is multiplied by variable cost £43 that is 129000
Total sales – cost
300000-137700= 162300 this is the final money will be raised by event for fundraising.
SECTION B
Question 4
1. Budgeting and Forecasting
These are the tools used by firm in order to establish a management plan, mostly both of
them are often used together. Budgeting quantifies the business expectation of revenues that
every company wants to accomplish for a future period. Manager of the company can know
about the financial position and financial health of firm by maintaining budget report (Boukari
and Veiga, 2018). They can understand cash inflow and outflow by managing budgetary reports.
Sometimes management team may need to be flexible and allow the company's budget to be
adjusted throughout the year. On the other hand, forecasting is helpful to estimate the revenue
amount or income that will be achieved in a future period. For example- a management team of
team can use forecasting and budgeting in order to make important decisions and take immediate
action based on data. These tool tells the firm to move in right direction so that management plan

can be done successfully. Unlike budgeting process, forecasting does not able to analyse and
evaluate the variance between actual performance and financial forecasts.
2. Variance Analysis.
Managers of the firm used this to find out the overall over performance for particular
reporting period (Dai and et.al., 2021). It can be analysed through difference between actual and
planned numbers. Firm compare standard costs and actual costs in order to assess their
Favorability for each item related to business. For example- for raw materials, if the standard
cost is more than actual cost, it would lead to a favourable price variance. If the 20000 pieces
were required in production and standard quantity was 15000 pieces of raw material, this would
be an unfavourable quantity because more raw materials were used than predicted.
3. Adverse variances.
When actual income is less than budget or in other words actual expensed is more than
budget it is known as adverse variance. Adverse variance can occur due to instant change in
economic conditions, such as low customer spending, economic growth and development, or a
recession which can impact the whole economy and leads to high unemployment rate. For
example- Due to this market conditions can also impact, such as entry of new company with
something advanced services and new products.
4. Favourable variance
when actual expenses is less than budget or in other words actual income is more than
budget it is known as favourable variance. This variance is the similar to a surplus where
expenses of the company is less than the income. For example- if a company expected to pay
around $150000 for maintenance of tools and equipments but was able to contract a price of
$90000 then they will have a variance in favourable condition of $60000.
5. Flexible Budget
This budget is helpful for company to track the actual spending and adjust those spending
each month. This budget will accurately reflect the state of company's finances, where the
management team can decide the level of output to be produced (Zamfir and et.al., 2021). So,
that profit can be generated easily for the business based on cost at various activity level and
budgeted sales. For example- Morrisons has a budget of $4 million cost of goods sold, $1 million
is fixed and $10 million in revenues. $3 million varies directly with revenue so Morrisons, cost
of goods sold is 30% of revenues.

Question 5
1. Average daily rate (ADR)
This is the statistical unit used by hotel or other lodging business in order to measure the
average rental revenue earned for a room which is occupied per day.
For example- if a Hyatt hotel has $30000 in room revenue and 300 rooms sold, the ADR would
be $100.
ADR= Rooms Revenue/ Rooms sold
= 30000/ 300
=100
2. Revenue per available room
Hotel industry or hospitality industry used this to measure performance and assess a
hotel's ability to fill its availability of room at an average rate (Chattopadhyay and Mitra, 2019).
With the help of RevPAR, company can find out its occupancy rate whether it is increasing or
decreasing. In other words, hoteliers can easily measures the overall success of their business.
For example- if a Radisson hotel is occupied at 60% with an ADR of $100, then RevPAR would
be $60. Average daily rate* occupancy rate
Another method CALCULATION EXAMPLE-
total revenue= 3250000
Considered period= 90days
Number of rooms= 600
RevPAR= 3250000/54000
= 60
3. Average length of stay
This is a tool used by healthcare industry in order to monitor and determine when and
where to make necessary changes so that they can easily improve efficiency. It is calculated by
adding the total length of stay for patients and dividing by the total number of discharge patient
in a month.
For example- A healthcare facility has 5 patients in the month of March 2022
Date admission/ discharge Patient Stay
March 2 to march 4 A 3 day

March 4 to march 5 B 2 day
March 14 and leaves same day C 1 day stay
March 16 to march 25 D 10 day
March 16 to march 24 E 9 day
Total 25
Average length of stay = 25/ 5 patient stays
= 5 days
4. Average rate index
Average rate index is calculated by hotel industry which shows them how their rates
compare with other competitors to help determine if they need to raise, hold or lower room rates
(Average rate index, 2022). If the rate is greater than 1 than hotel is said to be on averaged priced
higher than the other hotels.
Example= ADR/ competitor set's ADR
= 60/50= 1.2 = 120
It means an ADR above 1 indicates that the hotel property is achieving more than its fair
market share which is beneficial for the company (Bartolomeo, Trerotoli and Serio, 2021). On
the other hand, below 1 shows that hotel price is lower and needs to improve their performance.
Knowing this data in detailed can help managers of the company decide whether to adjust rate to
improve bookings or attain low occupancy rate.
5. Customer satisfaction
This is most important term which is used in marketing, the firm evaluate its customer
satisfaction level which measure how company's service or product meet customer expectation.
In other words, it measures whether customers are happy with the services given by the firm and
if they meet the expectation. With the help of feedback, ratings, KPIs and benchmarking
company can determine how to best improve or make necessary changes to its services or
products. Customer satisfaction is one of the most important factor or indicators of customer
loyalty towards the brand (Khan and Hashim, 2020). By understanding, the customer satisfaction
level company can predict business revenue and growth. For example= If amazon wants to know

about customer satisfaction level then marketing and sales team will survey and collect feedback
from customer about their expectation. They will make questionnaire and ask customer to rate
their experience from 1 to 10 or from excellent to poor. This can be done through emails,
personal interviews, marketing campaigns and message.
Example=
 Are you satisfied with the services or products offers by the company?
 How did the employees of our company provide you services?
 How do you rate your shopping experience with us ?
 Any suggestion to improve product performance ?
Calculation of CSAT- customer satisfaction.
If Tesco plc had 400 positive responses out of 500 total responses than CSAT score would be
80%
=Number of positive responses/ total number of responses* 100
=400/500×100
=80%

REFERENCES
Books and Journals
Bartolomeo, N., Trerotoli, P. and Serio, G., 2021. Short-term forecast in the early stage of the
COVID-19 outbreak in Italy. Application of a weighted and cumulative average daily
growth rate to an exponential decay model. Infectious Disease Modelling. 6. pp.212-221.
Boukari, M. and Veiga, F. J., 2018. Disentangling political and institutional determinants of
budget forecast errors: A comparative approach. Journal of Comparative
Economics. 46(4). pp.1030-1045.
Casazza, M., 2019. New formulations for variable cost and size bin packing problems with item
fragmentation. Optimization Letters. 13(2). pp.379-398.
Chattopadhyay, M. and Mitra, S. K., 2019. Determinants of revenue per available room:
Influential roles of average daily rate, demand, seasonality and yearly trend. International
Journal of Hospitality Management. 77. pp.573-582.
Dai, M. and et.al., 2021. A dynamic mean-variance analysis for log returns. Management
Science. 67(2). pp.1093-1108.
Khan, M. A. A. and Hashim, H., 2020. Tourist satisfaction index for tourism destination,
integrating social media engagement into the European customer satisfaction index: a
conceptual paper. International Journal of Academic Research in Business and Social
Sciences. 10(9). pp.72-90.
Lapidus, N. and et.al., 2020. Biased and unbiased estimation of the average length of stay in
intensive care units in the Covid-19 pandemic. Annals of intensive care. 10(1). pp.1-9.
Li, F., Zhu, Q. and Liang, L., 2018. Allocating a fixed cost based on a DEA-game cross
efficiency approach. Expert Systems with Applications. 96. pp.196-207.
Zamfir, M. and et.al., 2021. Flexible Budget: Management Method for Cost Control and
Monitoring the Performance of Economic Entities. In CSR and Management Accounting
Challenges in a Time of Global Crises (pp. 128-155). IGI Global.
Online
Average rate index. 2022. [Online]. Available through: <https://www.siteminder.com/what-is-
average-rate-index-ari/>