2.2- Finance Planning Flashcards
What is a sales forecast?
A sales forecast estimates the volume of value of future sales using market research or past sales data.
What are the purposes of sales forecasting? (5 points)
- Avoid cash flow problems
- Frees up management time
- Production capacity
- Employ more workers
- Start promotional activity
What are the 3 factors that affect sales forecasting?
- Consumer trends
- Economic variables
- Action of competitors
What is sales volume?
How many goods have been sold.
What is sales revenue?
How much money has been made.
What is the equations to work out sales volume?
Sales volume= Sales revenue/selling price
What are fixed costs?
Costs that do not vary with the level of output.
What is a budget?
A budget is an estimate of income or expenditure for a set period of time.
What are the 4 purposes of budgets?
- Planning
- Forecasting
- Communication
- Motivation
How does a budget promote planning within a business?
A business can use a budget to help them plan for any expenses in the year (e.g tax).
How does a budget promote forecasting within a business?
Sales or revenue forecasts are typically based on a combination of the business sales history and how effective they expect their future trading to be.
How does budgets promote communication within a business?
Setting a budget in a small or large business is an ideal opportunity for the owners to communicate their objectives of the business in a financial plan.
How does budgets promote motivation within a business?
Budgets can be used to motivate staff to be more careful with the finance.
What are historical budgets?
- Budgets set for a business using current financial figures and based on historical performance of the business.
- Previous years income and expenditure are used as a base on which to build the budget figures for the next year.
What is a zero based budget?
- Budget set for a business by using figures based on potential performance.
- This method takes away all historical assumptions and starts with a clean slate.
- May be used by a start up with no historical data.
What is variance analysis?
- Analyse the budget figures against what actually happens, there might be a variance.
- Favourable variance, the manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit.
- Adverse variance, the manager has overspent and it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year.
What are the difficulties of budgeting?
- Tendency for managers to spend up to the limit.
- Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic.
What are the limitations of budgeting?
- Budgets can cause inter department rivalry as some departments get more money than others.
- Can make managers short term and short sighted, they become budget driven rather than consumer driven.
What is break even?
Break even is the point at which total revenue equals total costs, so the business is making neither profit nor a loss, TR=TC.
What is revenue?
The amount that you receive from sales.
What is profit?
Profit is revenue minus costs.
What is contribution?
Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business. (Profit without minusing the fixed costs).
What is the equation for contribution?
Selling price- variable costs per item
What is the equation for break even?
Break even= FC/SP-VC per unit
What is the equation to find the margin of safety?
Margin of safety= Actual sales- Break even level of sales.
