2.2 Financial planning Flashcards
purpose of sales forecast
estimate future sales levels or revenue generated by a business
planning and budgeting - basis for developing strategies, sales targets, and budgets
resource allocation - productive capacity, inventory levels, marketing efforts, workforce planning
performance evaluation - benchmark to assess actual sales performance against projected targets
financial projections - essential inputs for financial projections, help businesses project revenue, cash flow, and profitability for financial planning and decision making
factors affecting sales forecasts
consumer trends - consumer preferences, behaviors, demographics, purchasing patterns
economics variables - GDP growth, inflation rates, interest rates, employment levels, consumer confidence
action of competitors - competitor strategies, product launches, pricing decisions, marketing campaigns, and market positioning
difficulties of sales forecasting
uncertainty - predicting future outcomes is risky bcz of market dynamics, changing consumer behavior, and external factors
lack of historical data - new businesses or product launches may not have historical sales data which mean forecasting can be more challenging and may be inaccurate
seasonality and cyclical patterns - seasonal variations and cyclical trends can make it difficult in accurately forecasting sales as demand fluctuates
complex market factors - market saturation, technological advancements, regulatory changes, geopolitical events, can all complicate forecasting
sales volume
quantity of units sold during specific period of time
sales revenue
unit sales x selling price per unit
fixed costs
expenses that do not change with level of production or sales volume
variable costs
expenses that vary in direct proportion to the level of output or sales volume
variable cost per unit x number of units
contribution
sellice price - variable cost per unit
break even point
total fixed costs + total variable costs = total revenue
calculate break even point
break-even point (in units) = total fixed costs / contribution per unit
margin of safety
(actual sales - break even sales) / actual sales
limitations of break even analysis
assumptions - like fixed and variable costs, constant selling price, and linear cost-volume-profit
simplified model - BEA implied complex business dynamics by assuming linear relationships - ignores factors like market demand fluctuations, economies of scale, pricing strategies, or seasonality
limited scope - BEA provides insights into profitability at specific sales volume - does not consider other imp factors like market comp, pricing strats, market share, or long term sustainability
single product focus - BEA more suitable for businesses with single product or uniform pricing structures - becomes more complex in multi product or variable pricing scenarios
purpose of budgets
plan, allocate, and control finacial resources
financial planning - help sets financial goals, forecast revenue and expenses, and allocate resources efficiently
resource allocation - funds, manpower, materials to different departments or projects based on priorities
performance evaluation - provide benchmark for measuring actual performance against planned targets, facilitating performance evaluation and identify areas for improvement
decision making - budgets aid in making informed decisions by providing a framework to assess financial implications of different options
control and accountability - budgets establish financial control mechanisms ensuring that actual financial outcomes are monitored
types of budgets
historical figures
-involves using past financial data
-adjusts them for expected changes
zero-based
-starting from scratch
-evaluate and prioritize all expenses or activity
variance analysis
compares actual fianncial performance against budgets amounts to identify and understand reasons for differences (variances)
helps business identify areas of success or concern, take corrective actions, and improve future budgeting accuracy
