2.2 Financial Planning

Question 1

What is a Sales Forecast?

Answer 1

projection of future sales revenue
often based on previous sales data

Question 2

What does a Sales Forecast link with?

Answer 2

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

Question 3

What is Extrapolation?

Answer 3

forecasting future trends based on past data

Question 4

What is a Time Series Data used for?

Answer 4

method that allows businesses to predict future levels from past figures

Question 5

What are the factors affecting Sales Forecasts?

Answer 5

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

Question 6

What are the limtiations of a sales forecast?

Answer 6

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

Question 7

What are the benefits of a sales forecast?

Answer 7

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

Question 8

What is the difference between Short run and Long run?

Answer 8

Short run = atleast one FoP is fixed
Long run = all FoP are variable

Question 9

What is the sales volume?

Answer 9

quantity of output sold in a period of time

Question 10

What are semi-variable costs?

Answer 10

costs that consist of both fixed and variable elements

Question 11

What is the break-even?

Answer 11

when a business generates enough revenue to cover its TC
TR=TC

Question 12

What is a contribution?

Answer 12

when variable costs have been subtracted from the revenue

then the money is contributed to the fixed costs and profit

Question 13

Equation to calculate break-even using contribution?

Answer 13

fixed costs / contribution

Question 14

Equation for contribution per unit?

Answer 14

selling price per unit - VC per unit

Question 15

What is the margin of safety?

Answer 15

actual sale - break even point

how much over sales is from the BE point

Question 16

How can you use break-even analysis?

Answer 16

• tool to make decisions about the future
• found in business plans

Gaining finance
- banks ask for business plans when giving loans

Question 17

What are the limitations of Break-even analysis?

Answer 17

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

Question 18

What is a budget?

Answer 18

financial plan that is agreed in advance
planned outcome that the firm hopes to achieve

Question 19

What is zero-based budgeting?

Answer 19

system of budgeting where no money is allocated for costs or spending unless it can be justified by the fund holder

Question 20

What is a variance?

Answer 20

difference between actual and budgeted
Favourable (F)
Adverse (A)

Question 21

What are the difficulties of budgeting?

Answer 21

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

Question 22

What are the benefits of budgeting?

Answer 22

• controls expenses
• targets
• making decisions: investment, hiring, expansion
• communication
• motivated workers

Question 23

What will budgets depend on?

Answer 23

Dynamic of market (using historical data)
Managers experience?
how good is the monitoring process?