(2.2) Financial Planning Flashcards
What is Sales Forecasting?
Using a range of techniques and information to predict future sales volumes and values.
What are the benefits of sales forecasting?
- 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
What are the difficulties of sales forecasting?
- Volatile customer tastes and preferences
- Can be subjective and can reply on the experience of the manager within the business
- Volatile markets
What factors may affect sales forecasting?
- Customer trends
- Economic Variables
- Actions of competitors
- Seasonal variations (eg xmas)
- Fashion
- Long-term Trends
What is sales volume?
The quantity of output sold in a set time period
What is the formula for total contribution?
Total Revenue - Total Variable Cost
What is the formula for contribution per unit?
Selling price - Variable price per unit
What is the formula for Break-even?
Fixed Cost / (SP - VC)
What is the Break-even point?
Where total revenue = total cost
What is the Margin of Safety?
Its the difference between the break-even point and the current level of output.
What are the limitations of the Break-even point?
- Assumes all stock is sold
- Costs are rarely constant
- Inefficient when multiple products are involved
What are the uses of break even analysis?
- 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
What are the benefits of the Break-even point?
- 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
What is a budget?
A plan of income and expenditure over a period of time
What is Profit Budget?
Income budget - expenditure budget
What is sales/ Income Budget?
The agreed income of a business over a period of time
What is Expenditure (Cost) Budget?
The agreed amount spent of a business over a period of time
What is zero based budgeting and the advantages and disadvantages?
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
What is historical budgeting and the advantages and disadvantages?
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
What are the difficulties of budgeting?
- Creating figures for the budget
- Motivation ( unrealistic budgets)
- New government decisions can impact the budget
- Reliant of accurate data
What is the purpose of budgeting?
Motivation - Provides workers with targets
Planning - Forces management to plan for the future
Efficiency - helps control spending
What is Variance Analysis?
The difference between the planned and actual budget figures
What is adverse variance?
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
