2.2 Financial Planning Flashcards
Formula for sales revenue
sales volume x selling price
What are fixed costs
- costs that do not change as output changes
- linked to time (e.g. rent) rather than how busy the business is
- price always stays same- even when business isnt producing/ when business is producing loads
How does a rise in sales affect fixed costs
a rise in sales spreads fixed cost over more units- meaning fixed cost per unit is lower
Give examples of fixed costs
- rent
- heating
- lighting
What are variable costs
- costs that change depending on output
- e.g. if manufacturer doubles amount produced- material costs would double
Give 3 examples of variable costs
- raw materials
- fuel costs
- packaging
What are total costs
-adding together fixed and variable costs
Formula for total variable costs
variable cost per unit x number of units produced (output)
What is sales forecasting
Sales forecasting is the process of estimating future revenue by predicting the amount of product or services will be sold
Name 4 purposes of sales forecasting
- HR plan- ensures staff with right skills are employed and correct number of staff are at work
- marketing budgets- business
- profit forecasts and budgets- when planning how much firm is expecting to make in rev profit- basis will be accurate sales forecasts- help shape expectations of spending
- production planning- to satisfy demand for product businesses need to ensure enough materials are brought and enough products are made- work back from sales forecasts
Name 4 factors affecting sales forecasts
consumer trends -> demand in markets change as consumer tastes & fashions change -> affects market demand, share
economic variables -> demand is sensitive to changes in; interest rates, exchange rates
actions of competitors ->
What is a trend
general path that a variable takes over a period of time
How do consumer trends affect sales forecasting
-tastes and habits change as time passes so effective sales forecasting must allow for changing of this
Give examples of possible consumer trends
- demographics- ageing pop- increased demand for products aimed at elderly
- globalisation- increased willingness to buy products which recognises global nature of todays world
- affluence- consumers have befome wealthier- more able/ willing to spend on luxuries
- economic variables- brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products
How do economic variabkes affect sales forecasts
brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products
How does changes in individual economic variavles effect sales
-name 3 ways
- value of pound- decrease in value of pound makes imports more expensive- push buyers to buy UK-produced products
- changes in taxation-taxes on individual items can affect demand, as well as general taxation (VAT)
- inflation- higher than rate of increase of average incomes- consumers would need to spend less- decrease in sales
Name 3 ways actions of competitiors can affect sales
- changing price- competitor that undercuts ur price- likely to steal sales- making sales forecast optismic
- launching new products- launch of new prodyct or new competitor can have negafive effect on forecasted sales
- promotional campaigns- competitors running succesfdul campaigns- steal market share- make sales forecasts look optimistic
Name a difficulty of sales forecasting
-extrapolation- sales forecasting assumes past trends will continue
-
Name the 3 methods of sales forecasting
extrapolation
correlation
confidence intervals
What is extrapolation
-uses trends established from historical data to forecast future
What is correlation
looks at strength of relationship between 2 variables
What are confidence intervals
gives % probability that estimated range of possible values includes the actual value estimated
Name 3 circumstances where sales forecasts are likely to be inaccurate
new business
product is a fashion item
demand is hughly sensitive to changes in price and income (elasticity)
how do you work out % change
new - old/ old x100
What are the 3 types of correlation
- positive correlation- relationship where independent variable increases so does dependent v
- negative correlation- negative relationship exists where independent v increases and dependent v decreases in value
- no correlation- no discernible relationship between independent and dependent
What is breakeven
where a business is selling just enough to cover its costs without making a profit
To calculate breakeven what does a business need to know
- seling price
- variable costs per unit
- fixed costs
Give the formula for breakeven
fixed costs/ (selling price - variable costs per unit)
What should the fixed cost line always be on a graph and why
- fixed cost line should always be flat
- as costs are at the same level of output
Where should the total cost line always be on the graph and why
- starts on left at the fixed cost line
- as it shows the effect of adding fixed costs and variable costs
Where should the total revenue line always be on the graph and why
- starts at point (0,0)
- as no revenue is generated if nothing is sold
Where is the breakeven output line on the graph and what does it tell you
- identified by dropping a vertical line from the point where TR and TC cross
- tells you the amount of output needed to be sold to cover costs
definition of overhead costs
costs incurred by business as a whole
definition of budgets
target for revenue/ costs for future time period
Name the 2 things budgets are set for
- income
- expenditure
What is income budget
sets target for value of sales to be achieved
What is expenditure budget
gives budget-holders a limit under which they must keep their departments costs
Name 3 purposes of budgets
- focus on expenditure on companys main objectives for a time period
- expenditure budgets -> ensure department doesn’t spend more than company expects
- motivate staff to try and hit certain targets
Name the 2 types of budget
- historical budget
- zero-based budget
What is a historical budget
budget set using last years budget as a guide
-adjustments would be made for forseeable changes
What is a zero-based budget
setting budget to zero each year expecting budget holder to justify need for every pound they ask for
What is variance analysis
looking back to calculate difference between budgeted figure and actual figure that occurred
Name the 2 types of variances
- adverse
- favourable
What is adverse variances
when actual figure was worse than budgeted figure
What are favourable variances
when actual figure was better for business than the budgeted figure
What effect would it have on profit if the actual was lower than the budget in terms of income
-what variance would this be as a result
profit would be lower than expected
-adverse
What effect would it have on profit if the actual was higher than the budget in terms of income
-what variance would this be as a result
profit would be higher than expected
-favourable
What effect would it have on profit if the actual was lower than the budget in terms of expenditure
-what variance would this be as a result
profit would be higher than expected
-favourable
What effect would it have on profit if the actual was higher than the budget in terms of expenditure
-what variance would this be as a result
profit would be lower than expected
-adverse
Name 3 reasons as to why budget variances occur
- original budget was unrealistic
- target was not met due to factors beyond budget holders control
- target was not met due to factors within budget holders control
Name 4 difficulties with budgeting
- setting budgets
- agreeing budgets
- failing to understand causes of budget variance
- costs of system outweight benefits
Why can setting budgets be hard
hard to ensure targets are set realistically
Why can agreeing budgets be hard
less motivating and effective than giving budet-holders a genuine say in setting their own targets
Why can failing to understand causes of budget variance be hard
blaming budget-holder for failing to meet impossible target- demotivating
Why can the costs of system outweigh benefits be hard
less need for financial control to be delegated- single boss may be able to keep eye on all finances
What is contribution
amount of money left after deducting VC from sell price
-contributed towards fixed costs and then profit
Give the formula for contirbution
total sales - total varaible price
Give the formula for contirbution per unit
(selling price - variable cost) per unit
Total contribution formula
contribution per unit x number of units sold
How can you calculate profit using contribution
( total revenue - total unit cost ) - fixed costs
When is the breakeven point
when total sales = total costs
What is the margin of safety
difference between actual output and the breakeven point
What are some advantages of breakeven?
- focuses on what output is required to reach profitability
- helps management + finance providers better understand risk of business
- shows importance of keeping fixed costs to a minimum
- calculations are quick and easy
What are limitations to breakeven?
- unrealistic assumptions (products not sold at same price at differant levels of output
- sales are unlikely to be same as output ( build up of stock)
- variable costs dont always stay the same
- most businesses sell more then one product
- planning aid rather then decision making tool
What is profit budget
difference between sales revenue budgets and expenditure budgets
What is a limitation of budgeting revenue too low
budget: 700
actual: 800
- if budgeting was more accurate- business would be able to forsee £800 revenue- so actual figure couldve been higher
- as budget of 800- motivate workers beyond that figure- so business couldve produced an actual of 850
What is a moving average
-it takes a data series and smoothes out fluctuations to show an average
-aim is to take out the extreme of data
What is strong correlation
line of best fit indicates strength of correlation
-strong c -> little room between data points and the line
What is weak correlation
data points are spread far from line of best fit
What is a confidence interval
gives % probability that an estimated range of possible values in fact includes the actual value being estimated
