2.2 Financial planning Flashcards
What is sales forecasting?
It involves predicting future sales volume/values to inform key decisions
What might a business like to predict with accuracy?
• Future sales of products
• The effect of promotion on sales
• Possible changes in the size of the market in the future
• The way sales fluctuate at different time of year
What can time series analysis be used for?
To predict future trends
What does time series analysis involve?
Predicting future levels from past data. The data used are known as time series data.
What 4 components can a business identify in time series data?
• The trend: shows the pattern that is indicated from the figures
• Seasonal fluctuations
• Cyclical fluctuations
• Random fluctuations
What are the benefits of sales forecasting?
+ Inform cash-flow forecasts
+ Allow the business to plan orders of supplies
+ Enable the business to ensure it has the correct staffing levels
+ Enable the business to ensure that it has the capacity to meet the projected orders
What factors affect sales forecasting?
• Consumer trends: habits and behaviours of consumers around the products they buy
• Economic variables: measurements of different aspects of an economy gives indication of performance
• Actions of competitors: competitors use a strategy to capture market share from a rival
What are the difficulties of sales forecasting?
• Data may not be accurate
• Consumer trends can be volatile
• Economic variables can be volatile
• No-one can predict consumer/business confidence
What is sales volume?
The amount of sales expressed as a number of units sold
What is sales revenue?
The amount of sales expressed as the total sum of money spent by consumers
How do you calculate sales volume?
Sales Volume = Sales Revenue / Selling Price
How do you calculate sales revenue?
Sales Revenue = Selling Price x Quantity Sold
What are fixed costs? Examples?
Costs that stay the same regardless of output, eg rent or managers salaries
What are variable costs? Examples?
Costs that change in relation to the number of items produced, eg raw materials
How do you calculate total variable cost?
Total Variable Cost = Variable Cost x Quantity
How do you calculate total cost?
Total Cost = Fixed Cost + Total Variable Cost
What is average cost?
The cost per unit of production, also known as the unit cost
How do you calculate average cost?
Average Cost = Total Cost / Output
How do you calculate percentage change?
Percentage Change = (New - Original / Original) x 100
How do you calculate profit?
Profit = Total Revenue - Total Costs
What is contribution?
The difference between selling price and variable costs
How do you calculate contribution per unit?
Contribution Per Unit = Selling Price - Variable Cost
How do you calculate total contribution?
Total Contribution = Total Revenue - Total Variable Cost
What is the break-even point?
When a business is not making a profit nor loss. At this point total costs must be the same as total revenue.
What is the break-even output?
The level of output a business needs to produce so that total costs are exactly the same as total revenue. It makes neither a profit nor loss.
How do you calculate break-even output?
Break-even Output = Fixed Costs / Contribution
What is the margin of safety?
The amount of sales that can fall before the break-even point is reached and the business makes no profit. This calculation tells a business how many sales have been made after the break-even point.
What are the uses of break-even analysis?
• Sets targets for minimum sales
• Shows to potential investors to illustrate ability to make a profit
• Assess impact of changing variables eg what will happen if a business lowers price in response to a new competitor
• Calculate profit and loss at different levels of output
What are limitations of break-even analysis?
• Output and stocks
• Unchanging conditions
• Accuracy of data
• Non-linear relationships
• Multi-product businesses
• Stepped fixed costs
What is a budget?
A financial plan that is agreed in advance. It is not a forecast. A planned outcome the firm hopes to achieve, based on objectives. Most budgets are set for 12 months.
Why have a budget?
• Control and monitoring: setting targets and measure them
• Planning: anticipate problems and solutions
• Co-ordination
• Communication - keeps a clear framework
• Efficiency: to give financial control to different layers
• Motivation: incentive to reach budgeted targets
What are the two types of budgets?
• Historical figure budget
• Zero based budget
What are historical figure budgets?
Using prior data from historical data and adjusted based on future events, estimations and professional judgement
What are zero based budgets?
No money is allocated for costs or spending unless it is justified by the budget holder to ensure all spending is good value for money
What are advantages of zero based budgets?
• The allocation of resources should be improved
• A questioning attitude is developed which will help reduce unnecessary costs
• Staff motivation might improve because evaluation skills are practised
• Encourages managers to look for alternatives
What are disadvantages of zero based budgets?
• It is time consuming as budgeting involves collecting and analysing detailed info
• Skilful decision making is required
• It threatens the status quo which might adversely affect motivation
• Managers may not be prepared to justify spending on certain costs
What is variance analysis?
It compares the budget data to actual figures. It can be used to analyse the accuracy of the budgeting process and to help make decisions about budget adjustments.
What should a business be doing if variances are adverse?
Questioning what are the reasons and how can you avoid this in future. For example, question suppliers.
What should a business be doing if variances are favourable?
Questioning what strategies and systems are working well and how can you continue them. For example, effective advertisement.
When do favourable variances occur?
When the actual figures are ‘better’ than the budgeted figures
When do adverse variances occur?
When the actual figures are worse than the budgeted figures
Why is setting budgets a difficult process?
• Budget figures are not actual
• Inaccuracy of sales data
• Conflict between departments
• Time taken to draw up budgets
• Over ambitious objectives makes budget targets that are unachievable
What are other difficulties of budgeting?
• Motivation: workers not involved will lack motivation
• Manipulation: budgets could be made easier to look more successful
• Rigidity: strict budgets constrain business activities
• Short-termism: cutting costs in short term over long term quality of customer issues
