2.2 - financial planning

Question 1

sales forecast

Answer 1

a prediction of how many sales a business may make in the future using statistical analysis
prediction is based on what has happened in the past, what the business wants to do in the future, and the market the business operates in

Question 2

advantages of forecasting

Answer 2

• gives the business a clear idea of what the cash flows will be so finances can be managed
• allows the business to plan for supplies & components to reach the orders
• enable to undertake recruitment of staff to meet sales in the future
• ensures the business has the production capacity to deliver the orders/sales that will be placed in the future

Question 3

time series analysis

Answer 3

• involves predicting future levels from past data
• set of data arranged in order over a period of time

Question 4

factors affecting sales forecasting

Answer 4

• consumer trends: seasonal variations, fashion
• economic variables: economic growth, interest rates, inflation, unemployment
• action of competitors

Question 5

sales revenue

Answer 5

• value of output sold by a business
• price x quantity

Question 6

total costs

Answer 6

• fixed costs + total variable costs

Question 7

total variable costs

Answer 7

total quantity of output x variable cost per unit of output

Question 8

average costs

Answer 8

total cost / average output

Question 9

profit / loss

Answer 9

total revenue - total costs

Question 10

sales volume

Answer 10

number of units of production sold by a business

Question 11

fixed costs

Answer 11

• costs which stay the same at all levels of output
• examples: rent, wages electricity

Question 12

variable costs

Answer 12

• costs which change with the level of output
• example: raw materials

Question 13

break even

Answer 13

• total costs are equal to total revenue, neither making a profit nor a loss
• fixed costs / contribution

Question 14

contribution

Answer 14

per unit = selling price - variable costs per unit

Question 15

advantages of break-even

Answer 15

• knows the amount of items
• decides prices
• sets targets
• fixed and variable costs
• easy way to calculate profit

Question 16

disadvantages of break-even

Answer 16

• doesn’t take into account costs or selling prices
• forecast sales might not be achieved
• targets may be too high

Question 17

budgets

Answer 17

• a plan that is agreed in advance
• plan not a forecast
• shows the money needed for spending
• most are set for 12 months

Question 18

historical budgets

Answer 18

budgets that are prepared using historical figures

Question 19

zero based budget

Answer 19

when costs cannot be justified, no budget is allocated to them

Question 20

advantages of zero-based budgets

Answer 20

• questioning attitude is developed
• staff motivation increased
• encourages managers to look for alternatives
• allocation of resources is improved

Question 21

disadvantages of zero-based budgets

Answer 21

• affects motivation negatively
• skillful decision-making is required
• time consuming
• managers may not be prepared

Question 22

opportunity cost

Answer 22

what a company misses out on when purchasing something

Question 23

variance

Answer 23

• difference between the figure that the business has budgeted for and the actual figure
• calculated at the end of the budgetary period
• actual - budget

Question 24

cash flow forecast

Answer 24

a prediction of the inflows and outflows of cash in a business and the amount of cash the business has at the end of a period ( cash not profit )

Question 25

advantages of cash flow forecasts

Answer 25

• allows for better decision-making
• highlights potential times of cash problems
• can be used to get a bank overdraft / loan

Question 26

disadvantages of cash flow forecasts

Answer 26

• only a forecast therefore not exact
• the forecasts are only as good as the figures entered
• rapidly changing business environment may make the forecasts less meaningful