2.2 Flashcards
Definition of Sales forecast
Predication of achievable sales revenue based on data analysis trends , economic variables and competitor actions
Purpose of a sales forecast
To see if they will need to increase their productive capacity - produce more , buy more factory space , employ more workers
How can a sales forecast be produced
Market research - the accuracy of the data will impact on the quality of the forecast
Things they might look at - how many future sales they’ll make , effect of promotion on sales , changes in the size of the market , seasonal sales
Definition of time series analysis
The prediction of future sales based on past data
The four key components that a business will try to identify using time series data
The trend
Seasonal fluctuations
Cyclical fluctuations - impact of economy
Random fluctuations
How to calculate percentage change
Difference / Original x 100
Factors affecting sales forecasts
Consumer trends
Seasonal variations
Competition
Long term trends
Economic growth rate
Inflation rate
Unemployment levels
Interest rates
Exchange rates
Definition of Consumer trends
The Habits and behaviours of consumers around the products they buy and how they use them
Definition of Seasonal variations
How sales will vary across the seasons
Definition of economic growth
The increase in the total output of the economy measured by GDP
Definition of interest rates
Cost of borrowing or the benefits of saving
Definition of inflation
The sustained rise in the general price level over time
Definition of Exchange rates
The value of one currency in terms of another currency
Difficulties of sales forecasting
Historical data may not reflect future performance
Seasonality may affect sales
Natural disaster cannot be foreseen
Fluctuations in demand
A new business has no historical data to look at
Really hard to accurately predict the future
Definition of Costs
What a business has to pay in order to continue operating
Definition of Fixed Costs
Costs that don’t change with output
Definition of Variable costs
Costs that change with output
How to calculate total costs
Fixed costs + variable costs
How to calculate variable costs
Variable cost per unit x quantity produced
Total costs - fixed costs
How to calculate profit
Total revenue - total costs
How to calculate average cost per unit
Total cost / output
How to calculate revenue
Price x quantity sold
Definition of revenue / sales value
The amount of money earned by selling a product
Definition of sales volume
The number of units sold
How can revenue be increased
Increase price
Increase quantity
Definition of Loss
Total costs are greater than total revenue
Definition of Break even e
Total costs are equal to total revenue
Definition of Profit
Total costs are less than total revenue
How to calculate Break even
Fixed costs / sales price - variable costs
Definition of Margin of safety
Difference between actual output and break even
Definition of Budget
A financial plan that is agreed in advance
It shows how much money is needed and where it will come from
Purpose of budgets
Control and monitoring
Planning
Co-ordination
Communication
Efficiency
Motivation
Types of budgets
Sales volume - planned sales level
Sales revenue - uses sales volume budget and prices to show planned revenue
Production costs - based on sales volume budget and all planned production costs
Overheads - all planned indirect costs
Total costs - all planned business costs
Marketing - planned spending on research , advertising and promotion
R and D - planned spending on research and development
Profit - planned revenue , costs and profit
Cash - planned inflows and outflows and cash balances
Master - a summary of all budgets
Definition of Historical budget
Budget based off of past data
Definition of Zero based budget
A budget set using figures based on potential performance and no previous data to base it off
Cons of historical budgets
Businesses are dynamic
Incremental budgeting could occur which can lead to inefficiencies and missed opportunities for cost savings
Pros and cons of zero based budget
Pros :
Improves allocation for resources
A questioning attitude is developed which will help reduce unnecessary costs and eliminate inefficient practices
Staff motivation could be increase due to the practise of evaluation skills and a greater knowledge of operations might develop
Encourages managers to look for alternatives
Cons :
Time consuming
Skilful decision making is required and decisions may be influenced by subjective opinions
Requires the bidding manager to have good negotiation skills
It threatens the status quo
Managers may not be prepared to justify spending on certain costs
What is a Favourable variance
Spent less then expected - costs lower then budgeted
More income then budgeted
What is adverse variance
Spending more then budgeted - costs higher then budgeted
Income is lower then budgeted
Reasons for favourable variance
Ability to charge higher prices
An increase in demand
Improvements in the quality of the product
Increase in consumer incomes
A change in consumer’s tastes
Reasons for adverse variances
Costs higher due to production being higher
Supplier raise prices
Some inefficiencies in production
Higher wages due to wage demands
Difficulties in setting budgets
They’re planned figures - inaccurate due to human error and based on historical figures
One of the most significant data is sales data - if this is inaccurate most budget figures will be inaccurate
May lead to conflict between departments
Time - could of been used completing other tasks
Budget can be too ambitious - so no longer a bench mark
Budgets could be too small - so no longer a bench mark
Motivation of workers
Manipulation - some managers might have greater influence on coordinating and setting budget
Rigidity - can sometimes constrain business activities
Short termism - some managers could be too focused on the budget and take actions that undermine the future performance of the business
