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Business Alevel > 2.2 Financial Planning > Flashcards

2.2 Financial Planning Flashcards

1
Q

What is consumer income?

A

the amount of income remaining after taxes and expenses have been deducted from wages

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2
Q

What are consumer trends?

A

the habits and behaviors of consumers that determines the goods and services they buy

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3
Q

What are economic growth?

A

the rise in output of an economy as measured by growth in Gross Domestic Product (GPD) usually as a percentage

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4
Q

What is economic variables?

A

measures within the economy which have effect on businesses and consumers, Examples include unemployment inflation and exchanges rates

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5
Q

What is Extrapolation?

A

forecasting future trends based on past data

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6
Q

What is forecasting?

A

a business process assessing the probable outcome using assumptions about the future

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7
Q

what is sale forecast?

A

projection of future sales revenue, often based on previous sales data

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8
Q

What is time series data?

A

a method that allows a business to predict future levels from past figures

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9
Q

What is the purpose of sales forecasts?

A
  • How much stock to purchase?
  • How many staff to employ?
  • How much finance is required?
  • What marketing strategy?
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10
Q

What is time series analysis?

A

this is a forecasting technique which uses historic data to predict future sales forecasts

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11
Q

what are different ways of time series analysis?

A
  • trend
  • seasonal fluctuation
  • cycle fluctuation
  • random fluctuation
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12
Q

how can trends be used as a method of analysis?

A

raw data shows patterns of sales figures, this allows trends to be identified

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13
Q

how can seasonal fluctuation be used as a method of analysis?

A

most business are unlikely to maintain constant leads of sales over a 12 month period

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14
Q

how can cycle fluctuation be used as a method of analysis?

A

performance of a business based on the position of the economy in the business cycle

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15
Q

how can random fluctuation be used as a method of analysis?

A

freak figures that stand out from the trend, usually influenced by external factors

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16
Q

What is important to remember about time series analysis?

A
  • time series analysis does not attempt to explain data it is solely looking at the data to inform prediction
  • further investigation may be required to identify the factors behind the result
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17
Q

How can you calculate sales adjustments?

A

Change on sales/original x 100

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18
Q

What are the benefits of sales forecasting?

A
  • informs cash-flow forecasts
  • plan for deliveries of supplies
  • ensures correct staffing levels
  • ensure that business can identify any capacity issues
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19
Q

What factors affect sales forecasting?

A
  • consumer trends
  • economic variables
  • action of competitors
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20
Q

How do consumer trends affect sales forecasting?

A

business need to satisfy their customers’ needs and desires the ones who are the most successful at doing this are the ones who can anticipate changes in consumer trends, either by identifying them or influencing them

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21
Q

What are the factors under the consumer trends?

A
  • seasonal variation
  • fashion
  • long term trends
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22
Q

How does Seasonal Variation affect sales forecasting?

A
  • certain industries are seasonal in nature and its important that businesses account for that in their planning
  • The obvious ones are holiday resorts, Christmas tree and ice cream sales
  • However, utility companies, such as gas ad electric also have season variation in their usage
  • Its important that businesses that see high levels of seasonal demand account for this to ensure that any spending on either capital or revenue expenditure dont impact negative on the businesses cash-flow
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23
Q

How does fashion affect sales forecasting?

A
  • consumer preference and tastes can vary widely and quickly interpreting and anticipating fashion choices is a difficult and unpredictable business
  • fashion and technology are 2 sectors hit hard by this uncertainty and as such, it makes accurate sales forecasting very difficult
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24
Q

How does long term trends affect sales forecasting?

A
  • whilst some trend change quickly, other charge over time
  • from Black & White TVs and leaded petrol engine cars to Smart devices that allow you to surf the internet there are longer term developments in consumer trends
  • as technology develops slowly, so do our expectation of services, from tape recorders and blockbusters to streamed films as you want them, its taken years for these developments to materialize
  • environmental considerations also impact on consumer views as they currently strive to ‘protect the planet’
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25
Q

How does economic variables affect sales forecasting?

A
  • charges in the wider economy will have a great impact on the businesses ability to accurately forecast.
  • they economy in this respect refers to consumers (households), businesses and government
  • Perception on future performance will have a big impact on sales predictions
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26
Q

What are difference factors under economic variables?

A
  • economic growth
  • interest rates
  • inflation
  • unemployment
  • exchanges rates
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27
Q

How does economic growth affect sales forecasting?

A
  • economic growth is measured by the relative increase in GDP of an economy. it can affect forecasts in the following wages
  • if GDP grows at a rate which is in line with, or better then anticipated, this can be seen as positive and an lead to an increase in business sales as confidence is high
  • if GDP growth slows ,this can be an indicator towards future issues, which can lead to reduced confidence and reduced consumer spending on non-essential items
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28
Q

How does a rise in interest rates affect sales forecasting?

A
  • the cost of borrowing increases due to larger interest payments, this reduces people willingness to take loans to purchases larger items
  • customers have more intensive to save as they receive more interest, more saving reduced spending
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29
Q

How does a fall in interest rates affect sales forecasting?

A
  • as less interest is paid, the cost of borrowing larger amounts of money is reduced, infrastructure and larger household purchases
  • As rewards for saving are less, there’s little incentive to do so consumers may spend cash instead
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30
Q

How does inflation affect sales forecasting?

A
  • inflation measures the general rise in the increase in price over time
  • increases in price must be matched to similar wages rises, otherwise the purchasing power of the consumers income is reduced. Over the long term, high inflation will reduce customer spending
  • This would usually lead to reduced sales forecasts
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31
Q

How does unemployment affect sales forecasting?

A
  • unemployment measures the number of people who are out of work but actively seeking employment
  • if unemployment is low, this means that businesses feel confident about the strength of the economy as consumers feel secure in their jobs, with less need to save
  • However, if unemployment is high, that these out of work will be living off reduced incomes, meaning they have less disposable income, this will lead to a reduction in spending on all but non-essential items, this would lead to reduced sales forecasts
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32
Q

How does exchange rates affect sales forecasting?

A

-the exchange rates between one currency and anther reflects the relative value of those currencies and their purchasing power in the other
-Exchange rates only affect a business if they either purchase products or material from overseas, or they sell to those markets
-If the value of the pound falls relative to another currency, then it becomes cheaper for customers from overseas to buy UK manufactured products, in this scenario, companies would increase their sales
forecast
- if the value of the pound rises, then the goods sold overseas increases in prices , this would usually see a reduction in sales forecasts

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33
Q

how does action of competitors affect sales forecasting?

A

the action of competitors has a major impact on many areas, from innovation to pricing and promotion. Sales forecasting is an area which can be greatly affected by the action of competitors

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34
Q

What issues will businesses have to consider when considering the actions of competitors?

A
  • New players moving into markets
  • Rivals new products
  • Internal development
  • business relocating to/from your area
  • web based sales
  • acquisition and merger (joining of businesses)
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35
Q

What are the difficulties of sales forecasting?

A

-volatile consumer tastes can lead to misinterpretation of sales figures, using data only to inform forecasting can lead to wrong decisions being made

36
Q

What are the uses of ranges of data and experts opinions?

A
  • there is lots of information available to businesses and governments, but also consumers
  • ensuring that the RIGHT data is used is fundamental. Combinations of primary and secondary data will be used, but businesses must be careful, inaccurate data could lead to dangerous inaccurate forecasts
  • Expert opinions can also lead to issues when forecasting , Whilst ‘experts’ may have a better understanding of the market,they can still call it wrong
37
Q

What is meant by the term long run?

A

the time period where all factors of production are variable

38
Q

What is meant by the term short run?

A

the time period where at least one factor of production is fixed

39
Q

What is average cost or unit cost?

A

the cost of producing one unit, calculated by dividing the total cost by the output

40
Q

What are fixed costs?

A

a cost that does not change as a result of a change in output in the short run

41
Q

What is profit?

A

profit = total revenue - total costs

42
Q

What is meant by the terms sales revenue?

A
  • the value of output sold in a particular time period

- it is calculated by price x quantity of output

43
Q

What is meant by the term sales volume?

A

the quantity of output sold in a particular time period

44
Q

What is meant to semi-variable cost?

A

a cost that consists of both fixed and variable elements

45
Q

What is meant by total cost?

A
  • he entire cost of producing a given level of output

- total cost = fixed cost + variable costs

46
Q

what is meant by total revenue?

A

the amount of money the business receives from selling output

47
Q

what is meant by variable costs?

A

a cost that rises as output rises

48
Q

what is the definition of break-even?

A

when a business generate just enough revenue to cover its total costs

49
Q

what is a break-even chart?

A
  • a graph containing the total cost ad total revenue lines, illustrating the break-even output
  • The level of output a business needs to produce so that total costs are exactly the same as total revenue is called the break-even output.
50
Q

what is the break-even output?

A

the output a business needs to produce so that its total revenue and total costs are the same

51
Q

what is contribution?

A
  • Contribution is the difference between the price a product is sold for and the price it cost to produce it.
  • REMEMBER that contribution is only the money left over after taking away the variable costs. This money then CONTRIBUTES towards other fixed cost such as rent, insurance and other expenditures. Only after all other costs are paid does it then add towards the profits of a business.
52
Q

What is the formula to work out contribution per unit?

A

contribution per unit = selling price - Variable cost

53
Q

What is meant by total contribution?

A

Unit contribution can calculate the contribution on the sale of one unit. However sometime you may want to work out the contribution of a larger quantity such as a whole year’s output. This is called Total Contribution.
Total contribution is used when the contribution for more than one unit sold is required. There are two different formulas you may want to use to calculate total contribution.

54
Q

How do you calculate total contribution?

A
  • total contribution = total revenue - total Variable Cost

- Total contribution = Unit contribution x number of units sold

55
Q

How can you use contribution to calculate profit?

A

Profit = Total contribution - Fixed Costs

56
Q

What is break even?

A
  • Break-even is essentially when the Total Revenue of a business is equal to the Total Costs of a business. All businesses, especially those just starting up, want to know how much money they need to make or how many units they need to sell in order to cover all the cost of there business.
  • At the point the business is making neither a profit nor a loss. Most businesses use this as a sort of ‘performance milestone’ where it shows that all costs have been covered and that any future sales will generate profits for the business.
57
Q

What is the break-even point?

A

The exact point where total revenue and total costs are equal is know as the Break-even point. This then tells a business that any future sales made after this point will account towards their profits.

58
Q

What is the break-even output?

A

The level of output a business needs to produce so that total costs are exactly the same as total revenue is called the break-even output.

59
Q

how do you calculate break-even?

A
  • Break-Even output = FIxed costs/ Contribution

- Break-even = fixed costs/ (selling price - Variable cost)

60
Q

What is meant by margin of safety?

A
  • Sometime businesses may want to know how much sales could fall before they start making a lose. This is called Margin of Safety. it refers to the difference in the break-even output and the output where profit is being made.
  • Businesses prefer to operate with a large margin of safety. This means that if sales fall they still might make some profit. With small margins of safety there is a risk that the business is more likely to make losses if sales fall.
61
Q

How is break-even analysis used?

A

Helps answers the ‘what if’ questions e.g.:
If price went up. What would happen to the break-even point?
-If the business introduced a new product line how many would the new product have to sell to at least break-even?
-If the businesses is just starting up, what has to be the level of output to prevent a loss being incurred?
-What will happen to the break-even point id costs are forecast to rise?
-Would the break-even point be lower if components were bought in from outside suppliers rather than being made in-house?
Break-even analysis is also found in business plans. Banks often ask for business plans when deciding whether or not to give a loan. So break-even analysis can be vital in gaining finance especially when starting up a business.

62
Q

What are the limitations to break-even analysis?

A
  • Output and stocks
  • Unchanging conditions
  • Accuracy of data
  • Non-linear relationships
  • Multi-product business
  • Stepped fixed costs
63
Q

How is output and stocks a limitation to break-even analysis?

A

it assumes that all out is sold, so output equal sales and no stocks are held. many businesses hold stocks of finished goods to cope with changes in demand, there are also times when firms cannot sell what they produce and choose to stockpile their output to avoid laying off staff.

64
Q

How is unchanging conditions a limitation to break-even analysis?

A

the break-even chart is drawn for a set of given conditions, it cannot cope with a sudden increase in wages or price or changes in technology

65
Q

How is accuracy of data a limitation to break-even analysis?

A

the effectiveness of break-even analysis depends on the quality and accuracy of the data used to construct cost and revenue functions, if the data is poor and inaccurate the conclusions that are drawn from the data are flawed; for example costs are underestimated or the level of output required to break even will higher than the break-even chart suggests

66
Q

How is Non Linear relationships a limitation to break-even analysis?

A

: it is assumed that the total revenue and total costs lines are linear or straight. This may not always be the case e.g. a business may have to offer discounts on larger orders, so total revenues fall at high output. In this case the total revenue would rise then fall and be curved. Businesses can also lower costs by buying in bulk too, so costs may fall at high outputs and the cost function will be curved.

67
Q

How is Multi-Product Business a limitation to break-even analysis?

A

many businesses produce more than one single product. It is likely that each product will have different variable costs and different prices, the problem is how to allocate the fixed costs of the multi-product business to each individual product. There are a number of ways but none are perfect. Therefore if the fixed costs incurred by each product are inaccurate break-even analysis is less useful

68
Q

How is Stepped Fixed Costs a limitation to break-even analysis?

A

some fixed costs are stepped, for example in order to increase output a manufacturer may need it acquire more capacity. This may result in rent increasing therefore fixed cost would rise sharply. Under these circumstance it is difficult to use break-even analysis

69
Q

What is meant by the term Budget?

A

a quantitative economic plan prepared and agreed in advance

70
Q

What is meant by the term Budget Control?

A

a business system that involves making future plans comparing the actual result with the planned result and the investigating the causes of any difference

71
Q

What is meant by the term Production cost budget?

A

a firms planned production costs for a future period of time

72
Q

What is meant by the term sales budget?

A

a firms planned sales for a future period of time - can be measured in terms of volume or revenue

73
Q

What is meant by the term Variance?

A

the difference between actual finance outcomes and those budgeted

74
Q

What is meant by the term Variance analysis?

A

the process of calculating variances and attempting to identify their causes

75
Q

What is meant by the term zero-based budgeting or zero budgeting?

A

a system of budgeting where no money is allocated for costs or spending unless they can be justified by the fund holder (they are given a zero value)

76
Q

What is the purpose of a budgeting?

A

budgets aim to fulfill the following purposes:

  • control and monitoring
  • planning
  • Co-ordination
  • Communication
  • Efficiency
  • Motivation
77
Q

What is meant by Sales (Income) Budget?

A
  • it links to the marketing targets of the business
  • it is subdivided into different elements to allow analysis of different sources - particularly in multi-product firms
  • it helps the business to assess expenditure needs, especially raw materials, staff etc.
  • it includes other sources of income, such as rent received
78
Q

What is meant by Production Cost (Expenditure) budget?

A
  • the expenditure budget can be more complex than the income budget , as there are many different items of expenditure in a business e.g.
  • raw materials/components
  • labor costs
  • marketing expenditure
  • administration costs
  • rent
  • capital costs
79
Q

What is meant by Profit budget?

A
  • profit budget = income budget - expenditure budget
  • the profit budget usually as an annual focus to avoid seasonal distortions
  • it is important for regular review to assess whether budget targets are being hit
80
Q

What is favourable variance?

A

when costs are lower than expected or revenue is higher than expected

81
Q

What is adverse (unfavourable) variance?

A

when costs are higher than expected or revenue is lower than expected

82
Q

How do you calculate variance?

A

variance = budget figure - actual figure
- for variance analysis, F is for favourable variances, and A for adverse variances, rather than positive and negative numbers

83
Q

When would favourable variance happen?

A
  • actual income is greater than budgeted income

- actual costs are below budgeted costs

84
Q

When would adverse variance would be shown?

A
  • actual income is less than budgeted income

- actual costs are above budgeted costs

85
Q

what are some methods of setting a budget?

A
  • budgeting according to company objectives
  • budgeting according to competitors’ spending
  • setting the budget as a percentage of sales revenue
  • zero budgeting/budgeting based on expected outcomes
  • budgeting according to last year’s budget allocation
86
Q

what are some reasons for setting budgets?

A
  • to gain financial support
  • to ensure that a business does not overspend
  • to establish priorities
  • to encourage delegation and responsibility, and to motivate staff
  • to assign responsibility
  • to improve efficiency
87
Q

What are some problems with setting budgets?

A
  • managers not knowing enough about the division or department
  • difficulties in gathering information
  • unforeseen changes
  • changes in prices that are difficult to foresee
  • problems arising from budgets being imposed
  • the time taken in setting budgets

Business Alevel (26 decks)

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