2.2 Financial Planning Flashcards
What is Sales forecasting?
Sales are the lifeblood of business and an essential part of financial planning that uses past and current sales statistics to predict future performance
What are some of the factors affecting Sales Forecasts?
Economic Factors - Inflation, Taxation, Value of the pound
Consumer Trends - Fashions, Tastes, Demographics, Affluence
Competitors’ Actions - Changing prices, New Products, promotional activites
What is Extrapolation
the means by which future data are predicted using existing trends
What is a trend
the general direction in which a variable such as sales is heading
What is revenue
money made from sales price X quantity
What is Variable Costs
Costs that vary directly with the level of output
What is Fixed Costs
Costs that do not change as a result of changes in the level of output
what is total costs
fixed costs + variable costs
how do you work out profit
contribution total - fixed costs
what is contribution
he difference between sales revenue and variable costs and is calculated by
Contribution = sales revenue - variable costs
or
Contribution = unit contribution times output
What is the formula for Break Even point (break even output)
total fixed costs/ contribution per unit (selling price - variable costs per unit)
What is Break even output?
it is usually set out in a graph format where it shows the business how may units they did to sell in order to make a profit and is good for a business to measure how well they are doing
Draw out a rough examples of a break even output graph
insert pictures here
How do you calculate margin of safety?
= actual output - break even output
What are some of advantages of break even output
its easy to do
managers can see that they need to take action very fast
show how variations will affect the sales of the business
good for persuading the sources of finance to give them money
influences decisions on if new products can be launched yet
What are some of the disadvantages of break even output
assumes variable costs remain steady
analysis is for one product
if data is inaccurate then the results will be wrong
break even assumes you sell all the products
only tells you how many units you need not what you are actually going to sell
How do you identify the break even point on a break even chart
by seeing when the total costs and the total revenue crosses
What is an income budget
it forcecasts the amount of money that will come into the business as revenue
what is expenditure budgets
predict what the businesses total costs will be for the year taking into account both fixed and variable costs
What is profit budgets
uses income budget minus the expenditure budget to calculate the expected profit or loss
Name the types of Budgeting
Historical
Zero - Based
What is Historical Budgeting?
Is when the new years budgets are based on the percentage increase or decrease from last year. Is quick and simple but assumes the business conditions will stay the same
What is Zero - Based Budgeting?
is where budget holders start with a budget of £0 and then you have to get approval to spend money as a business
is usually more accurate
But takes longer to set up
What are the advantages of Budgeting?
can give motivation + targets
helps control income
helps review decisions
focus on priorities
is a communication tool
coordinate spending
persuade investors
