2.2 Financial Planning Flashcards
What is a Sales Forecast?
projection of future sales revenue
often based on previous sales data
What does a Sales Forecast link with?
Supply + Demand = seasonal times, higher demand, increase supply
Staffing = recruit more staff during periods of high sales expectatio
Market research = using historical data to predict future sales more accurately
What is Extrapolation?
forecasting future trends based on past data
What is a Time Series Data used for?
method that allows businesses to predict future levels from past figures
What are the factors affecting Sales Forecasts?
Consumer trends - seasonal, fashion, long term trends. habits and behaviours of consumers
Economic variables - economic growth, interest rates, inflation, unemployment, exchange rates
- gives indication of how an economy is performing
Action of competitors - more competitors > more supply in market > more choice > decreases sales forecast
What are the limtiations of a sales forecast?
Dynamic consumer trends and fashion
- trends always changing > harder to predict
Data
- lots of data, which is reliable?
- time consuming, opportunity cost
Subjective expert opinion
- final decision left to expert
- opinion could be wrong or inaccurate
What are the benefits of a sales forecast?
Helps business plan ahead
- informs cashflow > finances managed
- plan supply, how much stock needed
- correct staffing levels
- capacity needed to meet sales - more equipment, premises, machinery
What is the difference between Short run and Long run?
Short run = atleast one FoP is fixed
Long run = all FoP are variable
What is the sales volume?
quantity of output sold in a period of time
What are semi-variable costs?
costs that consist of both fixed and variable elements
What is the break-even?
when a business generates enough revenue to cover its TC
TR=TC
What is a contribution?
when variable costs have been subtracted from the revenue
then the money is contributed to the fixed costs and profit
Equation to calculate break-even using contribution?
fixed costs / contribution
Equation for contribution per unit?
selling price per unit - VC per unit
What is the margin of safety?
actual sale - break even point
how much over sales is from the BE point
How can you use break-even analysis?
- tool to make decisions about the future
- found in business plans
Gaining finance
- banks ask for business plans when giving loans
What are the limitations of Break-even analysis?
Unrealistic assumptions
products not sold at some price at different output
Sales not same at output
- not all output sold, build up of stock, wasted
Multiple products
- need to do BE for all products > time consuming > opportunity cost
What is a budget?
financial plan that is agreed in advance
planned outcome that the firm hopes to achieve
What is zero-based budgeting?
system of budgeting where no money is allocated for costs or spending unless it can be justified by the fund holder
What is a variance?
difference between actual and budgeted
Favourable (F)
Adverse (A)
What are the difficulties of budgeting?
Setting budgets
- inaccurate historical data
- deparments compete for funds, if budgets are limited
- time consuming
Manipulation
- managers have influence, sets low budgets > easy to achieve
- department looks successful, not achieving actual targets
Short-termism
- too focused on present, might take actions that undermine future performance
- e.g. cutting labour, will need staff in times of high demand
What are the benefits of budgeting?
- controls expenses
- targets
- making decisions: investment, hiring, expansion
- communication
- motivated workers
What will budgets depend on?
Dynamic of market (using historical data)
Managers experience?
how good is the monitoring process?
