2.2 Financial Planning

Question 1

What is sales forecasting?

Answer 1

A predict of the future revenues based on past sales figures.

Question 2

Key factors affecting sales forecasting

Answer 2

-Seasonal factors
-Consumer spending, habits, fashions
-Economic Growth
-Actions of competitors

Question 3

Define Extrapolation

Answer 3

Extrapolation uses trends established from historical data to forecast the future

Question 4

What is a moving average?

Answer 4

-A moving average takes a data series and “smoothes” the fluctuations in data to show an average

Question 5

benefits of using Extrapolation

Answer 5

-Simple method of forecasting
-Not much data required
-Quick and Cheap

Question 6

Disadvantages of Extrapolation

Answer 6

-Unreliable if there are significant fluctuations in historical data
-Assumes past tends will continue
-Ignore qualitative factors

Question 7

Define Correlation

Answer 7

Correlation looks at the strength of a relationship between two variables

Question 8

Circumstances where sales forecasts are likely to be inaccurate

Answer 8

-Business is new
-Technological change disrupts market
-Demand highly sensitive to changes in income
-Changes in market share
-Product is a fashion item

Question 9

Define Demand

Answer 9

The amount of a product that customers are prepared to buy

Question 10

Define Revenues

Answer 10

The Value of units sold

Question 11

Equation for Revenue

Answer 11

Revenue = Price x Quantity

Question 12

Two ways for a business to increase revenue?

Answer 12

-Increase quantity sold e.g by cutting price/incentives
-Achieve a higher selling price e.g add value

Question 13

Define costs

Answer 13

Costs are amounts that a business incurs in order to make goods and/ or provide services

Question 14

Define variable costs

Answer 14

costs which change as output arises eg wages, raw materials

Question 15

Define fixed costs

Answer 15

Costs which do not change when output varies eg rents & salaries

Question 16

Examples of variable costs

Answer 16

-Raw materials
-Bought in stocks
-Wages based on hours worked or amount produced
-Marketing costs based on sales

Question 17

Examples of fixed costs

Answer 17

-Rents
-Salaries
-Advertising
-Design and development

Question 18

Equation for total costs

Answer 18

total costs = fixed costs + variable costs

Question 19

What is contribution

Answer 19

-Contribution looks at the profit made on individual products
-Used to calculate how many items need to be sold to cover all costs

Question 20

Contribution per unit formula

Answer 20

Contribution = Selling price - variable costs

Question 21

Total contribution formula

Answer 21

Total contribution = Contribution per unit x number of units sold

Question 22

Assumptions of break even analysis

Answer 22

-Selling price per unit stays the same
-Variable costs vary
-All output is sold
-Fixed costs do not vary with output

Question 23

Define break even

Answer 23

The point at which total revenue and total costs are the same business neither making a profit or a loss.

Question 24

Define margin of safety

Answer 24

The difference between actual output and break even output

Question 25

Benefits of break even analysis

Answer 25

-Focuses on what output is required before a business reaches profitability -Helps better understand risk of a business -Illustrates importance of keeping fixed costs down

Question 26

Limitations of break even

Answer 26

-Accuracy relies on quality of the data -Variable costs differ -Most businesses sell more than one product -Assumes all output sold

Question 27

What is a budget?

Answer 27

A financial plan that a business sets about costs & revenues.

Question 28

Reasons for using budgets?

Answer 28

-Planning and monitoring -Control -Coordination & communication -Motivation & efficiency

Question 29

Three main types of budgets

Answer 29

-Revenue budget -Costs budget -Profit budget

Question 30

What are the two main approaches to budgeting?

Answer 30

-Historical budgets -Zero-based budgets

Question 31

What are historical budgets

Answer 31

-Use last years figures as the basis for budget -Realistic as based on actual results -Circumstances may have changed

Question 32

What are zero-based budgets?

Answer 32

-Budgets costs and revenues are set to zero -Requires all spending to be justified meaning unecessary costs can be eliminated -More complicated and time consuming but potentially more realistic

Question 33

Limitations of budgeting accurately

Answer 33

-Encourages short term thinking rather than long term performance -Unachievable or unambitious targets can impact motivation -Only as goof as data being used -Take time and skill to form

Question 34

Define Variance analysis

Answer 34

The differences between actual results and the budgeted figure

Question 35

Two ways variances can be...

Answer 35

-Favourable (better than expected) -Adverse (worse than expected)

Question 36

Causes of favourable variances

Answer 36

-Stronger market demand than expected -Selling prices increase higher than budget -Cautious sales and cost assumptions -Competitor weakness -Better than expected productivity or efficiency

Question 37

Causes of Adverse Variances

Answer 37

-Unexpected events lead to unbudgeted costs -Over spends by budget holders -Sales forecasts prove over optimistic

Question 38

Main uses of sales forecasting?

Answer 38

-To determine resource management eg staff, stock -Determine what will happen in the future eg volume and value of sales, size of the market, results of promotions.

Question 39

Difficulties of sales forecasting?

Answer 39

-Past data to predict future -Doesn't account for changed in tastes, fashions, competitor actions & economic factors

Question 40

Formula for Break even

Answer 40

Fixed costs / Contribution

Question 41

Formula for Margin of Safety

Answer 41

Sales volume - break even output