(2.2) Financial Planning

Question 1

What is Sales Forecasting?

Answer 1

Using a range of techniques and information to predict future sales volumes and values.

Question 2

What are the benefits of sales forecasting?

Answer 2

• Gives the business a clear idea of what cash inflows can be, so that finances can be managed
• Allows business to plan orders (some suppliers need notice)
• Enables the business to know if it has the correct no. of staff for the predicted staff
• Allows the business to have the correct capacity for the projected orders

Question 3

What are the difficulties of sales forecasting?

Answer 3

• Volatile customer tastes and preferences
• Can be subjective and can reply on the experience of the manager within the business
• Volatile markets

Question 4

What factors may affect sales forecasting?

Answer 4

• Customer trends
• Economic Variables
• Actions of competitors
• Seasonal variations (eg xmas)
• Fashion
• Long-term Trends

Question 5

What is sales volume?

Answer 5

The quantity of output sold in a set time period

Question 6

What is the formula for total contribution?

Answer 6

Total Revenue - Total Variable Cost

Question 7

What is the formula for contribution per unit?

Answer 7

Selling price - Variable price per unit

Question 8

What is the formula for Break-even?

Answer 8

Fixed Cost / (SP - VC)

Question 9

What is the Break-even point?

Answer 9

Where total revenue = total cost

Question 10

What is the Margin of Safety?

Answer 10

Its the difference between the break-even point and the current level of output.

Question 11

What are the limitations of the Break-even point?

Answer 11

• Assumes all stock is sold
• Costs are rarely constant
• Inefficient when multiple products are involved

Question 12

What are the uses of break even analysis?

Answer 12

• Decide whether a business idea is profitable and viable
• Identify the level of output and sales necessary to generate a profit…help scale the business
• Assess changes in the level of production
• Assess the effects of costing and pricing decisions

Question 13

What are the benefits of the Break-even point?

Answer 13

• Simple and easy to use
• Can help with decision making
• Can be used to analyse the potential impact of changing prices and costs
• Can be used to get bank loans

Question 14

What is a budget?

Answer 14

A plan of income and expenditure over a period of time

Question 15

What is Profit Budget?

Answer 15

Income budget - expenditure budget

Question 16

What is sales/ Income Budget?

Answer 16

The agreed income of a business over a period of time

Question 17

What is Expenditure (Cost) Budget?

Answer 17

The agreed amount spent of a business over a period of time

Question 18

What is zero based budgeting and the advantages and disadvantages?

Answer 18

There is no historical data therefore budgets needs to be justified

+Money is pent efficiently on sensible things and not wasted

-Lack of flexibility…Department may require finance immediately (eg a demand spike) which the justifying process may take too long for

Question 19

What is historical budgeting and the advantages and disadvantages?

Answer 19

Using historical data to create a budget and adapting it for the future

+Realistic as they are based on the past performance

-Assumes all factors ar constant

Question 20

What are the difficulties of budgeting?

Answer 20

• Creating figures for the budget
• Motivation ( unrealistic budgets)
• New government decisions can impact the budget
• Reliant of accurate data

Question 21

What is the purpose of budgeting?

Answer 21

Motivation - Provides workers with targets
Planning - Forces management to plan for the future
Efficiency - helps control spending

Question 22

What is Variance Analysis?

Answer 22

The difference between the planned and actual budget figures

Question 23

What is adverse variance?

Answer 23

Where the actual budget is worse than the planned, leading to lower profits or higher costs

This causes diseconomies of scale and increase in competition