2.2 Financial Planning

Question 1

What does a sales forecast do?

Answer 1

A sales forecast predicts future revenues based on past sales figures

Question 2

What are the factors that affect sales forecasts?

Answer 2

Consumer trends - seasonal,fashion, long term trends
Economic variables -economic growth, inflation, unemployment, interest rates, exchanges rates
Actions of competitors

Question 3

What are the difficulties of sales forecasting?

Answer 3

The future doesn’t always mirror the past
Interpretation can be different
Too much data

Question 4

What is sales volume?

Answer 4

Sales volume is the number of units sold by a business

Question 5

What is sales revenue?

Answer 5

Sales revenue is the value of the units sold by a business
Sales revenue = selling price * number of units sold

Question 6

What are fixed costs?

Answer 6

Fixed costs are costs that do not change as the level of output changes

Question 7

What are variable costs?

Answer 7

Variable costs are costs that vary directly with the output

Question 8

What is the calculation for total costs?

Answer 8

Total costs (TC) = Total fixed costs + total variable costs

Question 9

What is the calculation for total variable costs (TVC)?

Answer 9

Total variable cost (TVC) = Variable cost * quantity

Question 10

What’s the calculation for average total cost (ATC)?

Answer 10

Average total cost (ATC) = total cost / quantity

Question 11

What’s the calculation for variable cost per unit (AVC)?

Answer 11

Variable cost per unit(AVC) = total variable costs / quantity

Question 12

What is contribution?

Answer 12

Contribution refers to a products selling price minus the variable costs directly involved in producing that unit
Contribution = selling price per unit - variable cost per unit

Question 13

What is break even?

Answer 13

Break even point is where a total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit nor a loss

Question 14

What is the calculation for break even?

Answer 14

Break even = Fixed costs / contribution

Question 15

What are the limitations of break even analysis?

Answer 15

• Less useful when a business produces more than one product
• Accuracy relies on quality of data
• Assumes that all output is sold
• Revenue and total costs do not always have a linear relationship with output

Question 16

What is a budget?

Answer 16

A budget is a financial plan that a business sets about costs and revenue

Question 17

What are the reasons for using a budget?

Answer 17

• Planning & monitoring
• Control
• Coordination & communication
• Motivation & efficiency

Question 18

What are the types of budgets?

Answer 18

Historical based budget
Zero based budget

Question 19

What is a historical based budget?

Answer 19

A historical based budget is based on historical data

Question 20

What is a zero based budget?

Answer 20

A zero based budget requires all spending to be justified which means that many unnecessary costs can be eliminated

Question 21

What is a favourable variance?

Answer 21

A favourable variance is where the actual figure achieved is better than the budgeted figure

Question 22

What is an adverse variance?

Answer 22

An adverse variance is where the actual figure achieved is worse than the budgeted figure

Question 23

What are the difficulties of budgeting?

Answer 23

• Budgets take time and skill
• Can encourage managers to focus on short term rather than longer term
• Unachievable budgets can have a negative impact on motivation
• Budget is only as good as the data used to make it
• can lead to competition and conflict between different business function