2.2- Finance Planning

Question 1

What is a sales forecast?

Answer 1

A sales forecast estimates the volume or value of future sales using market research or past sales data.

Question 2

How do sales forecasts avoid cash flow problems?

Answer 2

• can help the business manage their production, staff and financing needs more effectively.
• can help a business to write the income part of the cash flow forecast.

Question 3

What are the factors affecting sales forecasts?

Answer 3

• Consumer trends.
• Economic variables.
• Actions of competitors.

Question 4

How do consumer trends affect sales forecasts?

Answer 4

• Documents like reports that Mintel produce can help a business to identify an upcoming trend.
• Fashion shows and trade fairs are also ways that a business can research new popular products.

Question 5

How do economic variables affect sales forecasts?

Answer 5

Economic variables such as interest rates, inflation, unemployment rates and GDP can all affect how a business plans its sales forecast.

For example some sales contracts may not be renewed due to inflation.

The UK economy is now in the recovery phase, so low cost retailers like Poundland’s may need to forecast lower sales.

Question 6

How do actions of competitors affect sales forecasts?

Answer 6

If a business has products that gave declining sales, perhaps because of a competitors superior product, they may decide to produce or sell less of those products.

Question 7

What are the difficulties of sales forecasting?

Answer 7

• No guarantees
• Dynamic markets
• Short term thinking

Question 8

How might no guarantees affect a sales forecast?

Answer 8

• It could affect it negatively.

A sales forecast has no guarantees that sales will meet the levels predicted.

This could be due to any number of uncertain factors e.g. impact of terrorism on tourism in some countries.

Question 9

How might short term thinking affect a sales forecast?

Answer 9

A sales forecast is useful for a business which can produce and sell products or services in a one year period.

For some businesses e.g. hotels, a one year forecast will not be useful for a multi-billion dollar contracts over a longer time period.

Question 10

How do sales forecasts free up management time?

Answer 10

• A well constructed forecast can allow the business owners to spend more time developing their business rathe than responding to day to day development in sales and marketing.
• Managers will have more time to focus on the rest of the business.

Question 11

How does production capacity affect sales forecast?

Answer 11

• The business can use the forecast to estimate if they need to increase or decrease production, this will help them to see if they have enough production capacity to deal with expected demand.
• The business may need to buy or rent new premises if there is a huge increase in sales forecast.

Question 12

How does sales forecast allow businesses to employ more workers?

Answer 12

• If the business has high sales forecast for a new product it may need to take on new employees to cope with the new levels of demand.
• Failure to meet required staffing levels could result in poor reviews in customer service and this may have an impact on future sales.

Question 13

How do sales forecast start promotional activity?

Answer 13

• If sales are forecast to be very low and the profit is not in decline phase of the produce lifestyle, then the business may decide to try and increase sales through promotion and marketing.
• Sales forecasts can also direct a business to a specific season or month when promotion activity would be likely to net the most sales revenue e.g. Christmas.

Question 14

Sales volume formula

Answer 14

Sales volume = sales revenue/selling price

Question 15

Sales revenue formula

Answer 15

Sales revenue = selling price x sales volume

Question 16

What are fixed costs?

Answer 16

Fixed costs are costs that don’t vary with the level of output e.g. rent

Question 17

What are variable costs?

Answer 17

Variable costs are costs that do bath with the level of output e.g. fuel, cost of stock sold, wages

Question 18

Total variable costs formula

Answer 18

Total variable costs = average variable costs x sales volume (quantity)

Question 19

Total costs formula

Answer 19

Total costs = variable costs + fixed costs

Question 20

Percentage change formula

Answer 20

Change
———— x 100
Original

Question 21

What’s break even?

Answer 21

Break even is the point at which total Costs = total revenue so the business is making neither a profit nor lost, TR=TC

Question 22

What is contribution?

Answer 22

The amount that each unit produced ‘contributes’ towards the fixed costs of the business.

Question 23

Contribution formula

Answer 23

Contribution = selling price - variable cost

Question 24

Full break-even formula

Answer 24

Fixed costs/contribution

Question 25

What does the margin of safety show?

Answer 25

It shows the number of sales that could be lost before the business makes a loss.

For example buddy could have 50 cakes go stale before he makes a loss in his bakery.

Question 26

Margin of safety formula

Answer 26

Actual sales - break even level of sales

Question 27

What are the limitations of break even analysis?

Answer 27

• Break even assumes everything that is made is sold, this is not always the case.
• Break even does not take into account any sales discounts or customers buy in bulk.
• The break even calculations are only as accurate as the days they are based on.

Question 28

What are the uses of break even analysis?

Answer 28

• Used by a business that is starting up to work out when they will stop making a loss.
• Used by business to write their business plan.
• Used as a “what if?” to work out what happens if prices or costs go up.

Question 29

What is revenue?

Answer 29

Income revived into a business, calculated by quantity x price.

Question 30

What are budgets?

Answer 30

A budget is an estimate of income or expenditure for a set prior of time.

Question 31

What are the purposes of budgets?

Answer 31

• Planning
• Forecasting
• Communication
• Motivation

Question 32

What is the purpose of planning a budget?

Answer 32

• A business owner can use a budget to help them plan for any expenses in the year e.g. tax
• A business budget is vital for the small business to help them identify where and when they may run into problems with finances.
• The business budget would usually run on a monthly basis with regular reviews to help planning.

Question 33

What is the purpose of forecasting a budget?

Answer 33

• Business owners can use forecasts to predict the business sales history and how effective they expect their future trading to be, from this they can make a budget.

Question 34

What is the purpose of communicating in budgeting?

Answer 34

• 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.
• Budgets also require departments or sections to report back on progress on a regular basis to their spending and income can be monitored.

Question 35

What is the purpose of motivational budgeting?

Answer 35

• Budgets can be used to motivate staff to be more careful with the finances.
• If staff are involved in the setting or budgets they are more likely to be more cautious when spending company money on items like stationary.
• If the budget is tied to perks and benefits, the employees are much more likely to keep their costs in line with the budgeted amounts.

Question 36

What are the different types of budgets?

Answer 36

• Historical budget
• Zero based budget

Question 37

What is a historical budget?

Answer 37

• This is a budget set for the business using current financial figures and based on historical performance of the business.
• The previous years income and expenditure are used as a base on which to build the budgets figures for the next year.
• Drawbacks is the that it does not account for shock, uncertainty, dynamic markets or actions of competitors.

Question 38

What is a zero based budget?

Answer 38

• This is a budget set for a business by using fugues based on potential performance.
• This method takes away all historical assumptions and starts with a clean slate.
• It may also be used by a start up with no historical data.
• Managers must justify levela of expenditure based on the number of customer they are likely to serve in the next year.

Question 39

What is variance analysis?

Answer 39

• The difference between the budgeted and the actual figure.

Question 40

Favourable variance.

Answer 40

• The manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit.

Question 41

Adverse variance.

Answer 41

• 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.

Question 42

What are the difficulties of budgeting?

Answer 42

• Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic.
• Tendency for managers to spend up to the limit.
• Time consuming to prepare, monitor and control.
• Unrealistic budgets can be demotivating.

Question 43

What are the limitations of budgeting?

Answer 43

• 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 customer driven.
• Some industries it’s difficult to plan ahead because of large unplanned changes e.g. in farming the weather can have a huge impact on crops.