2.2 Financial Planning Flashcards
cash flow forecasts
calculation for net cash flow
*without cash a business cannot trade = business must ensure that have enough cash to pay staff and bills
lists all the likely recipes (cash inflows) and payments (cash outflows) over future period of time
net cash flow = inflows = outflows
use of cash flow forecasts
identifying the timing of cash shortages and surpluses
= know when to borrow cash. helpful when businesses have seasonal demand (inflows will be irregular)
supporting applications for finance- look at businesses solvency
monitoring cash flow
limitations of cash flow forecasts
based on estimates such as costs and revenue = inflow + outflow inaccurate = net cash flow + closing balance unreliable
business activity is subject to external forces that are beyond control of owners and mangers
Eg: interest rates, economy , legislation, exchange rates
focus on only one important business variable - cash. other variables are important (profit, productivity)
cannot be used on its own to elevate performace
purpose of cash flow forecasts
assessing the probable outcome using assumptions about the future.
data gathered from: market research, managers
accuracy depends of reliability of data
time series analysis, predict future by using past data
= trading conditions need to be stable
- trend
- seasonal fluctuations
- cyclical fluctuations : “highs and lows”
- random fluctuations
(EXTRAPOLATION)
why predict?
- future sakes
- effect of promotion
-possible changes in size of market
- sales fluctuate seasonally
benefits of cash flow forecasts
informs businesses of future cash inflows = finance can be managed
business can plan orders of supplies
enable the business it has the correct staffing levels for projected sales
ensure business has the capacity to meet projected orders
factors affecting sales forecasting
consumer trends
seasonal variations
competitors
economic variables
- economic growth = consumer income increases
- interest rates
- inflation
- unemployment
- exchange rates
n
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break even - contribution
amount of money left over once variable costs have been subtracted from revenue
per unit = selling price - variable costs
total contribution= units contrition x number of units sold
total contribution= total revenue - total variable costs
break even point
calculate units sold to cover all costs
total costs = total revenue
=fixed costs/ contribution
margin of safety
range of output between breakeven level and the current level of output (profit is made)
=current sales unit- break even point
use of break even analysis + limitations
understand effect of:
change in price
breakeven point increased
change in level of output
BUT
- assumes that all output will be sold but many businesses hold stock to cope with changes in demand
- break even chart constructed based on certain conditions, doesn’t include possible changes in wages, prices, or technology
- business produce multiple products which would have different variable costs an fixed costs incurred by each product are inaccurate
-data needs to be accurate
purpose of budgets
- financial plan that is agreed in advance - outcome a firms hopes to achieve
show money needs for spending and how it will be financed
based on objectives of businesses
control and monitoring: mamgment to control the business by setting objectives and targets. compare result of budgets and objectives. = appropriate action can be taken
planning: force management to think ahead , can anticipate problems
communication: planning allows the objectives of the business to be communicated with the workforce = create a clear frame work . shows priorities
motivation: provides workers with targets and standards. improving on budget position is an indicator of success for department. give an incentive to workforce
types of budgets
historical based
data is based on previous months budgets = takes into economic indicators
zero based budgeting
no budget is allocated but all spending needs to be justified
(requires skill and time)
budgetary control+ variances
preparation plans -> comparison of plans with actual results -> analysis of variation ->
a variance is a difference between the figure the business had budgeted for and the actual figure
favourable: when actual figures are better then budgeted figures
adverse: actual figures are worse than budgeted figures: sales revenue may be lower than planned or actual costs may be higher than planned
