2.2 Financial Planning

Question 1

What is Sales forecasting?

Answer 1

Sales are the lifeblood of business and an essential part of financial planning that uses past and current sales statistics to predict future performance

Question 2

What are some of the factors affecting Sales Forecasts?

Answer 2

Economic Factors - Inflation, Taxation, Value of the pound

Consumer Trends - Fashions, Tastes, Demographics, Affluence

Competitors’ Actions - Changing prices, New Products, promotional activites

Question 3

What is Extrapolation

Answer 3

the means by which future data are predicted using existing trends

Question 4

What is a trend

Answer 4

the general direction in which a variable such as sales is heading

Question 5

What is revenue

Answer 5

money made from sales price X quantity

Question 6

What is Variable Costs

Answer 6

Costs that vary directly with the level of output

Question 7

What is Fixed Costs

Answer 7

Costs that do not change as a result of changes in the level of output

Question 8

what is total costs

Answer 8

fixed costs + variable costs

Question 9

how do you work out profit

Answer 9

contribution total - fixed costs

Question 10

what is contribution

Answer 10

he difference between sales revenue and variable costs and is calculated by

Contribution = sales revenue - variable costs

or

Contribution = unit contribution times output

Question 11

What is the formula for Break Even point (break even output)

Answer 11

total fixed costs/ contribution per unit (selling price - variable costs per unit)

Question 12

What is Break even output?

Answer 12

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

Question 13

Draw out a rough examples of a break even output graph

Answer 13

insert pictures here

Question 14

How do you calculate margin of safety?

Answer 14

= actual output - break even output

Question 15

What are some of advantages of break even output

Answer 15

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

Question 16

What are some of the disadvantages of break even output

Answer 16

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

Question 17

How do you identify the break even point on a break even chart

Answer 17

by seeing when the total costs and the total revenue crosses

Question 18

What is an income budget

Answer 18

it forcecasts the amount of money that will come into the business as revenue

Question 19

what is expenditure budgets

Answer 19

predict what the businesses total costs will be for the year taking into account both fixed and variable costs

Question 20

What is profit budgets

Answer 20

uses income budget minus the expenditure budget to calculate the expected profit or loss

Question 21

Name the types of Budgeting

Answer 21

Historical
Zero - Based

Question 22

What is Historical Budgeting?

Answer 22

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

Question 23

What is Zero - Based Budgeting?

Answer 23

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

Question 24

What are the advantages of Budgeting?

Answer 24

can give motivation + targets
helps control income
helps review decisions
focus on priorities
is a communication tool
coordinate spending
persuade investors

Question 25

What are the Disadvantages of Budgeting?

Answer 25

can cause resentment
cam be restrictive
time consuming
inflation is hard to predict
budget may be inaccurate

Question 26

What are the different types of Variance

Answer 26

Favourable, Adverse

Question 27

What is a Favourable Variance?

Answer 27

occurs when a firm is performing better than expected, so is positive

Question 28

What is a Adverse Variance?

Answer 28

occurs when a firm is performing worse than expected, is a negative

Question 29

What are some External reasons for a Variance?

Answer 29

Competitor Behaviour
Changes in the economy
Costs of raw materials ( Cost of Sales)

Question 30

What are some Internal reasons for a Variance?

Answer 30

Improving Efficiency
Overestimate the amount of money it can save
Change in selling price changes revenue
Can be a big concern for businesses so they need to improve their communication as a business

Question 31

What are some decisions based on Adverse Variances?

Answer 31

Change Marketing Mix
Cut Price
Update Business
Streamlining production makes more efficient
motivate employees to work harder
Ask Suppliers better deal on their materials
Additional Market Reasearch

Question 32

What are some decisions based on Favourable Variances?

Answer 32

more ambitious targets
increase productivity
increase production
additional staff