2.2 Flashcards
Sales forecasting
Sales forecasting: Predicting future sale volume/value
+ Purchasing raw materials/staffing
- Inaccurate data
Influencing factors:
- Consumer trends: Demands change as customer wants and needs change - effects the overall market demand
- Competitors: Hard to predict, often why sales forecasts are often over (Optimistic)
- Economy: e.g. changes in exchange rates, taxes, economic strength
Cash flow forecasting
Cash flow forecast: Prediction of cash going in/going out
+ Predict surges in demand
- Estimate, doesn’t account for external factors
Importance:
-Prevent insolvency
- Deficit - main reason for failure
How to improve:
- Speed up inflows
- Slow down outflows
Breakeven
Breakeven: Total revenue = Total costs (no profit nor loss)
+ Plan what needs to be sold to profit
+Make judgements about price/costs
- Assumes all products are sold at one price
- Assumes costs increase constantly
= Fixed costs/contribution
Principles of effective budgeting
- Managerial responsibilities are clearly defined
- Managers ave a responsibility to adhere to their budgets
- Performance is monitored against the budget
- Corrective action is taken if results differ from the budget
- Unaccounted for variance is investigated
- Departures from budgets are permitted only after approval from senior management
Why are budgets used?
- Establish priorities
- Set targets ad objectives
- Delegate without loss of control
- Provide direction/co-ordination
- Assign responsibilities
- Allocate resources
- Motivate staff
- Improve efficiency
- Monitor performance
- Control income/expenditure
Three main types of budget
Revenue (or income) budget:
- Expected revenues and sales
- Broken down into more detail e.g. products and locations
Cost (or expenditure) budgets:
- Expected costs based on sales budget
- Overheads and other fixed costs
Profit budget:
- Based on the combined sales and cost budgets
- Of great interest to stakeholders
- May form basis of performance bonuses
Implication of budgets
- De-motivating if they are imposed rather than negotiated
- Setting unrealistic targets add to the motivation
- Can contribute to departmental rivalry battles over budget allocated
- Spending up to budget - it can result in a ‘use it or lose it’ mentality - spend up to the budget to preserve it for next year
Budget methods
Budget: Financial plan for the future, NOT a forecast
Historical budget: Based on revenue/figures from last year
+ Realistic/based on numbers
- Doesn’t encourage efficiency (being better than last year)
- Circumstances may have changed (e.g. new products)
Zero budget: Creating budget with spending justified - ensures value for money
+ Helps minimise costs
+ Based on new proposals for sales and costs
For both:
- External factors - inflation etc
Fixed cost
Costs that do not vary with the level of output
Variable cost
Corporate expense that changes in proportion to how much a company produces or sells
Contribution
Contribution: Cash left over after variable costs
Margin of safety
Margin of safety: Difference between even of sales and breakeven point
Profit and revenue
Fixed costs: Paid regardless of sales e.g. rent/salary
How to increase profit:
- Increase revenue
- Decrease costs
Barriers to success
Personal:
- Lack self esteem/ideas
- Risk adverse/fear of failure
Economic:
- Taxation/legal barriers
Financial:
- Lack start up capital
- Lack cheap labour
- Lack investment
Political:
- Unstable political landscape
Extrapolation
Forecasting future trends based on past data
