2.2 financial planning

Question 1

What is a sales forecast?

Answer 1

Predicting future sales volume/sales revenue based on past sales data/market research

Question 2

What is the purpose of a sales forecast?

Answer 2

Marketing budgets - identify when promotional activity is needed

Finance - inform cash flow forecasts

Production planning

Question 3

What factors affect sales forecast?

Answer 3

Consumer trends

Economic variables

Actions of competitors

Question 4

How can consumer trends affect sales forecast?

Answer 4

Demographics

Affluence

Gloabalisation

Question 5

How can economic variables affect sales forecast?

Answer 5

Value of the pound

Changes with taxation

Inflation

Question 6

How can actions of competitors affect sales forecast?

Answer 6

Changing price

Launching new products

Promotional campaigns

Question 7

What were the difficulties of sales forecasting?

Answer 7

Hard to predict

Seasonality may affect sales

Natural disasters cannot be foreseen

Question 8

What is the formula for sales revenue?

Answer 8

Sales volume x selling price

Question 9

What is the formula for sales volume?

Answer 9

Sales revenue x selling price

Question 10

What are fixed costs?

Answer 10

Costs that don’t change as output changes

Have to be paid even when a business isn’t producing

Question 11

Examples of fixed costs;

Answer 11

Rent

Interest charges

Tax

Question 12

What are variable costs?

Answer 12

Costs that change in direct proportion to the level of output

Question 13

Examples of variable costs:

Answer 13

Raw materials

Fuel costs

Packaging

Question 14

What is the formula for total variable costs?

Answer 14

Variable cost per unit x no. of units produced

Question 15

What are total costs?

Answer 15

Shown when fixed costs and variable costs are added together

Figure that is deducted from sales revenue to calculate profit

Question 16

What is breakeven?

Answer 16

The point at which revenue equals cost so your business is making neither a profit or a loss

Question 17

How to calculate breakeven?

Answer 17

Fixed costs

Contribution

Question 18

What is contribution?

Answer 18

Difference between selling price and variable costs

Question 19

What is margin of safety?

Answer 19

The horizontal distance between the actual output of a business and it’s breakeven output

Question 20

Strengths of break even analysis:

Answer 20

Viability

Provides a target

Helps secure finance

Aids decision making

Can calculate the level of profit/loss at different levels

Can predict the outcome of changing variables

Question 21

Weaknesses of break even analysis

Answer 21

Assumes that every item produced is sold

Prices may differ

Costs may increase

Prediction so it may be bias

Presuming only one item is being sold

Question 22

What is a budget?

Answer 22

A target for revenue or costs for a future time period

Question 23

What can budgets be used for?

Answer 23

Income

Expenditure

Profit

Question 24

What is the purpose of a budget?

Answer 24

Planning

Motivations

Decisions

Control

Question 25

What is a historical budget?

Answer 25

A budget set for the business using current financial figures

Question 26

Pros of historical budgeting:

Answer 26

Realistic that it is based on last years sales

Question 27

Cons of historical budgeting:

Answer 27

Business is dynamic so the figures may be wrong

Question 28

What is zero based budgeting?

Answer 28

A budget set for a business by using figures based on potential performance

Question 29

Pros of zero based budgeting:

Answer 29

Can prevent wastage that occurs if all budgets creep upwards year after year under a system of historical budgeting

Question 30

Cons of zero based budgeting:

Answer 30

Time consuming

Question 31

What is a variance analysis?

Answer 31

Involves looking back to calculate the difference between a budgeted figure and the actual figure that occurred

Question 32

What does it mean if the variance is favourable?

Answer 32

The actual figure was better for the business than the budgeted figure meaning... Expenditure lower than budget Income higher than budget Profit higher than budget

Question 33

What does it mean if the business is adverse?

Answer 33

The actual figure was worse than the budgeted figure meaning... Expenditure higher than budget Income lower than budget Profit lower than budget

Question 34

How to respond to variances:

Answer 34

Change budgets Staff training Reward staff Change suppliers New marketing tactics Review product portfolio

Question 35

What are the difficulties of budgeting?

Answer 35

Inflexibility Time consuming Unrealistic budgets can be demotivating Businesses can be budget driven rather than customer driven May not account for external shocks e.g weather on farming