2.2 Financial Planning Flashcards
What are the purposes of sales forecasts?
Marketing planning
HR planning
Financial planning
Production or operations planning
What three factors affecting sales forecasts that make them difficult?
Consumer trends
Economic variables
Competitors’ actions
What is the formula for sales revenue?
Revenue = units sold x sales price
What are variable costs?
Costs that vary directly with the level of output
What are fixed costs?
Costs that do not change as a result of output changes
What is the break-even point?
The point at which enough money is generated from sales to cover the costs of the business.
What is the formula for contribution?
Contribution = sales revenue - variable costs
or
Contribution = unit contribution x output
What is the formula for unit contribution?
Unit contribution = sales price per unit - variable cost per unit
What is the margin of safety?
The difference between a business’s actual output and its breakeven output
What are the benefits of breakeven analysis?
Quick and easy
Useful for new businesses/start ups
Supports loan application
Measure profit and loss
Models ‘what if?’ scenarios
What are the limitations of breakeven analysis?
No costs are truly fixed
The analysis is only as good as the information provided
Sales revenue assumes all output is sold at uniform price
Total cost ignores bulk-buying discounts
What are the purposes of budgets?
Target for entrepreneurs and managers
Basis for later assessments of performance
Motivational for budget holders
Help with pricing
What are the two types of budget?
Historical
Zero-based
What is a historical budget?
A financial plan that uses the previous year as a guide
What is a zero-based budget?
A financial plan that starts afresh each year with the budget holder justifying all spending
What is a favourable variance?
When costs are lower than forecast or profit and revenue is higher than anticipated
What is an adverse variance?
When costs are higher than expected or revenues are lower than anticipated
What are the three stages in the process of setting budgets?
Prepare income budgets
Construct expenditure budgets
Forecast profit/loss through comparison of the two
What can favourable variance lead to?
Increased production if prices are rising
Reduced prices if costs are below expectations
Reinvestment in the business or higher dividend payments
What can adverse variance lead to?
Cost reductions
Increase advertising to increase sales
Reduce prices to increase sales (dependent on PED)
What are the difficulties of budgeting?
Lack of data
Forecasting costs can be problematic
Competitors actions may negate data used
Difficulties agreeing with budget holders
Lack of understanding of causes of variances
