2.2

Question 1

what do sales forecasts do?

sales forecasts predict ________ based on _________

Answer 1

predict future revenues based on past sales figures

Question 2

why are Sales forecasts important?

Answer 2

Sales forecasts are an important tool to support planning and can improve the validity of cash flow forecasts

Question 3

The Factors that can Cause Sales Forecasts to be Adjusted

Seasonal variations

Answer 3

Demand for certain goods is seasonal

Events such as major religious festivals, holiday periods and annual events impact demand for a wide range of products

Question 4

The Factors that can Cause Sales Forecasts to be Adjusted

Fashion

Answer 4

Fashion is often led by celebrities and their influence can have short-term impact on sales

Question 5

The Factors that can Cause Sales Forecasts to be Adjusted

Long term trends

Answer 5

Consumer behaviour, attitudes and spending habits change over time
In recent years environmentally-conscious consumers have led to many businesses amending sales forecasts to reflect increased demand for green products

Question 6

The Factors that can Cause Sales Forecasts to be Adjusted

Economic Growth

Answer 6

During periods of economic growth, increased consumer incomes will lead to higher than forecast sales
The opposite will occur during periods of economic slowdown and sales may be less than forecast

Question 7

The Factors that can Cause Sales Forecasts to be Adjusted

Inflation

Answer 7

The general increase in prices over time reduces consumers’ spending power
Firms may revise their sales forecasts downwards during periods of rising inflation
Firms may revise their sales forecasts upwards during periods of falling inflation

Question 8

The Factors that can Cause Sales Forecasts to be Adjusted

Unemployment

Answer 8

Increased levels of unemployment are often experienced during periods of recession and tend to be a key cause of reduced spending in the economy
Sales forecasts for lifestyle and luxury goods may reduce as consumers focus their spending on essentials

Question 9

The Factors that can Cause Sales Forecasts to be Adjusted

Interest Rates

Answer 9

When interest rates rise borrowing becomes more expensive for consumers

Businesses that sell products that consumers frequently buy on credit may therefore adjust their sales forecasts downwards

Question 10

The Factors that can Cause Sales Forecasts to be Adjusted

Exchange Rates

Answer 10

Where the value of UK sterling falls against other global currencies, overseas consumers will find British exports become relatively cheaper

Businesses that sell products overseas or that cater for tourists visiting the UK may adjust their sales forecasts upwards to reflect the expected increase in demand from a cheaper £

Question 11

The Factors that can Cause Sales Forecasts to be Adjusted

Actions of Competitors

Answer 11

Sales forecasts should consider short-term actions of competitors such as sales promotions as well as longer-term strategies such as changes to product ranges and expansion plans

Competitor actions are difficult to predict so the use of past data to predict future sales may be limited as a result

Question 12

pros of sales forecasts

Answer 12

allows companies to efficiently allocate resources for future growth and manage its cash flow.

Question 13

cons of sales forecasts

Answer 13

• It can be time-consuming and resource-intensive
• Forecasting involves a lot of data gathering, data organizing, and coordination. Companies typically employ a team of demand planners who are responsible for coming up with the forecast.
• It is difficult to avoid experience bias
• The future seldom repeats the past
• Sales forecasts will rarely reflect the full range of external influences that can affect future inflows such as fashions, trends, the actions of competitors

Question 14

sales revenue formula

Answer 14

sales revenue = selling price x number of units sold

Question 15

contribution formula

Answer 15

selling price per unit - variable cost per unit

Question 16

break even formula

Answer 16

fixed costs / contribution

• expressed in units

Question 17

pros of using break even analysis

Answer 17

• it shows how many products they need to sell to ensure a profit
• it shows whether costs need to be reduced to lower the BEP
• it can be used to persuade investors or banks to finance a business
• it is quick and easy to analyse

Question 18

cons of using break even analysis

Answer 18

• break-even assumes a business will sell all of the stock (of a particular product) at the same price
• businesses can be unrealistic in their calculations
• variable costs could change regularly, meaning the analysis could be inaccurate
• they can be time consuming to create

Question 19

margin of safety formula

Answer 19

actual level of output - break even level of output

Question 20

what is a budget?

Answer 20

a financial plan that a business sets about costs and revenue

The budget is usually closely aligned with the business objectives

Question 21

The Reasons for Using Budgets

Answer 21

• Planning & monitoring
• Control
• Coordination & Communication
• Motivation & Efficiency

Question 22

what are Historical figure budgets

Answer 22

Budgets are usually based on historical data and allow for factors such as Inflation and other relevant economic indicators (e.g. exchange rate variations)

Question 23

pros of historical budgeting

Answer 23

less time-consuming than other budgeting methods, as it involves minimal changes from year to year , reducing administrative burden.

Question 24

cons of historical budgeting

Answer 24

can discourage innovation and strategic thinking, as it prioritizes maintaining existing spending patterns over exploring new opportunities

Question 25

what is zero based budgeting

Answer 25

• not to allocate budgets
• requires all spending to be justified which means that many unnecessary costs can be eliminated

Question 26

pros of zero-based budgeting

Answer 26

Better cost control: Unsupported expenditures from prior years are called into question. Single-year expenses are not accidentally carried over into next year’s budget. Users can better grasp economies of scale, and ongoing spending must be justified based on its added value to the company.

Greater accountability: Managers who contribute revenue and expense projections during the budgeting process are held accountable for their performance. Planning is followed up with frequent monitoring throughout the year

Question 27

cons of zero-based budgeting

Answer 27

Short-term focus: Management may stay exclusively focused on short-term goals and stop short of fully funding long-term projects and objectives.

It can be time-consuming as evidence to support spending decisions needs to be collected and presented

Zero budgeting also** requires skilled and confident employees to make a persuasive case** to convince those making purchasing decisions

Question 28

what is budget variance and what is the point of it?

Answer 28

a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period (e.g. twelve months)
Variance analysis seeks to determine the reasons for the differences in the actual figures and budgeted figures

Question 29

what actions may a business take if there is an adverse cost varience?

Answer 29

may seek alternative suppliers or investigate ways to improve efficiency

Question 30

what actions may a business take if there is a adverse sales variance

Answer 30

a business may review its marketing activities to improve their effectiveness

Question 31

what are some of the difficulties to budgeting

Answer 31

• requires significant expertise to be of genuine use
• Data must be up to date, accurate and free of bias
• can encourage managers to focus on the short-term rather than the long-term success of the business as budgets are usually set year on year