2.2 Flashcards
what do sales forecasts do?
sales forecasts predict ________ based on _________
predict future revenues based on past sales figures
why are Sales forecasts important?
Sales forecasts are an important tool to support planning and can improve the validity of cash flow forecasts
The Factors that can Cause Sales Forecasts to be Adjusted
Seasonal variations
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
The Factors that can Cause Sales Forecasts to be Adjusted
Fashion
Fashion is often led by celebrities and their influence can have short-term impact on sales
The Factors that can Cause Sales Forecasts to be Adjusted
Long term trends
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
The Factors that can Cause Sales Forecasts to be Adjusted
Economic Growth
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
The Factors that can Cause Sales Forecasts to be Adjusted
Inflation
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
The Factors that can Cause Sales Forecasts to be Adjusted
Unemployment
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
The Factors that can Cause Sales Forecasts to be Adjusted
Interest Rates
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
The Factors that can Cause Sales Forecasts to be Adjusted
Exchange Rates
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 £
The Factors that can Cause Sales Forecasts to be Adjusted
Actions of Competitors
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
pros of sales forecasts
allows companies to efficiently allocate resources for future growth and manage its cash flow.
cons of sales forecasts
- 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
sales revenue formula
sales revenue = selling price x number of units sold
contribution formula
selling price per unit - variable cost per unit
break even formula
fixed costs / contribution
- expressed in units
pros of using break even analysis
- 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
cons of using break even analysis
- 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
margin of safety formula
actual level of output - break even level of output
what is a budget?
a financial plan that a business sets about costs and revenue
The budget is usually closely aligned with the business objectives
The Reasons for Using Budgets
- Planning & monitoring
- Control
- Coordination & Communication
- Motivation & Efficiency
what are Historical figure budgets
Budgets are usually based on historical data and allow for factors such as Inflation and other relevant economic indicators (e.g. exchange rate variations)
pros of historical budgeting
less time-consuming than other budgeting methods, as it involves minimal changes from year to year , reducing administrative burden.
cons of historical budgeting
can discourage innovation and strategic thinking, as it prioritizes maintaining existing spending patterns over exploring new opportunities
what is zero based budgeting
- not to allocate budgets
- requires all spending to be justified which means that many unnecessary costs can be eliminated
pros of zero-based budgeting
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
cons of zero-based budgeting
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
what is budget variance and what is the point of it?
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
what actions may a business take if there is an adverse cost varience?
may seek alternative suppliers or investigate ways to improve efficiency
what actions may a business take if there is a adverse sales variance
a business may review its marketing activities to improve their effectiveness
what are some of the difficulties to budgeting
- 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
