2.2-financial planning Flashcards
What is sales forecasting?
A method of predicting future sales using previous data (sales figures), market research or managerial estimates.
What is the purpose of sales forecasting?
-To help predict trends/patterns in sales
-To allow managers to make financial, strategic and marketing decisions- so they can plan for the future.
-Help the finance department predict cash flow forecasts and profit levels
-helps production department determine the amount of stock/machinery needed for level of output
-allows them to have the right resources, and amount of it eg. having the right amount of staff during seasonal peaks.
What are the problems with sales forecasting?
-Most methods rely on past data which may not be reliable if the market conditions change.
-Based on the continuation of past trends- only correct if the future is like the past and doesn’t change
-New business have no past data so it becomes difficult to make an accurate forecast
-May be difficult for businesses providing services as revenue from each customer varies- they wont be making the same amount per service provided.
What are the factors affecting sales forecasts?
1-Consumer trends
-consumer habits/tastes change overtime
2-Economy
-change in state of economy/ changes in tax can lead to more/fewer sales
3-Competitors
-if competitors change their price
-if a new competitor enters the market
4-seasonality/climate/weather
5-internal factors
What is sales volume?
What is sales revenue?
-The number of units sold by a business in a particular time period
-The value of sales in a given time period
Sales revenue= selling price x quantity sold
What are fixed costs?
-Costs that stay the same with output produced, and services provided
What are variable costs?
-Costs that change with output produced and services provided.
What are semi-variable costs?
-costs that are neither fixed or variable
Formula for unit/ average costs
unit cost=total cost
————-
output
What is break-even?
It compares a firms revenue with a firms total costs to determine the minimum number of sales needed to cover it’s costs.
The point of calculating break even is to see how many sales are needed, before the firm becomes profitable
Reasons for using break even?
- Results can be used to support an application for methods of finance eg. loan from the bank
-It helps the people starting a business decide level of output necessary to provide a profit.
-To calculate likely profitability of a product
-To assess the impact of change in level of sales on profitability
Benefits of using break-even analysis:
1- shows how long it takes a start up to reach profitability
2-attracts investors into the business
3-margin of safety shows how many sales a business can lose before they make a loss
4-helps entrepreneur understand the risk involved
5-calculations are quick and easy
Drawbacks of break-even analysis:
1-unrealistic as all products aren’t sold at the same price
2-sales may not be same as output- can be wasted stock
3-variable costs change
should be seen to help planning, rather than decision making.
What is a budget?
A target for sales or costs that a department must aim to reach over a period of time
What are the 3 types of budgets?
1-Income budget(sales budget)
-Sets the minimum target of income that should be met
- To set an income budget, businesses need to research and predict how sales change throughout the year.
2-Expenditure budgets(cost budgets)
-Sets the maximum amount of spending that shouldn’t be exceeded
-broken down into department expenditure budgets, where budget holders are responsible for spending
-businesses research how costs/tax/interest change over the year
3-Profit budget
-income budget-expenditure budget to predict profit
