2.2 financial planning Flashcards
What is a sales forecast?
They are predictions of future revenues based on past sales figures
How do businesses use sales forecasts to determine resource requirements?
How many staff needed?
How much stock required?
Does capacity need to be expanded?
Does the equipment need upgrading?
What factors affect sales forecasts?
Seasonal variations
Trends
Unemployment
Economic growth
Exchange rates
Competitor action
Why is it difficult to accurately sales forecast?
Too much data
Dynamic changes
Hard to interpret
Lack experience in forecasting
What is sales volume ?
Number of units sold by a business
What is sales revenue?
value of the units sold by a business
How do you calculate sales revenue ?
selling price x no. of units sold
What are fixed costs?
are costs that do not change as the level of output changes
What are variable costs?
costs that vary directly with the output
What are totals costs?
FC + VC
What is contribution?
this amount contributes towards paying off the fixed costs of the business
Once the fixed costs have been paid off, then the contribution starts to contribute to the profits of the business
What is the break even point?
Total revenue = total costs so neither a profit or a loss is made
Why do businesses want to know the break even point?
allows a business to understand how many items it needs to produce and sell to cover all costs before it starts to make a profit
What is the margin of safety?
difference between the actual level of output of a business and its break even level of output
What is the limitations of a break even analysis?
- less useful when a business produces more than one product
- accuracy relies on data in calculation
- revenue and total costs don’t always have a linear relationship with outputs
- assumes all output sold
- cannot be easily amended
What is a budget?
financial plan that a business (or department in the business) sets about costs and revenue
Why do businesses use budgets?
Planning
Control
Coordination
Communication
Motivation
What are the two types of budgets ?
Historical - financial plan that a business (or department in the business) sets about costs and revenue
Zero based - not to allocate budgets and all spending to be justified which means that many unnecessary costs can be eliminated
Why can zero budgeting be a problem?
– It can be time-consuming as evidence to support spending decisions needs to be collected and presented
– Zero budgeting also requires skilled and confident employees to make a persuasive case to convince those making purchasing decisions
What is variance analysis?
difference between a figure budgeted and the actual figure achieved by the end of the budgetary period
What is a favourable variance?
Where the actual figure achieved is better than the budgeted figure
What is an adverse variance?
An adverse variance is where the actual figure achieved is worse than the budgeted figure
What is the difficulties of budgeting?
Conflicts between business function
Encourage short termism
Unachievable impacts motivation
Only as good as data given
Must be constantly reviewed
