2.2 Financial planning

Question 1

What is sales forecasting?

Answer 1

It involves predicting future sales volume/values to inform key decisions

Question 2

What might a business like to predict with accuracy?

Answer 2

• 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

Question 3

What can time series analysis be used for?

Answer 3

To predict future trends

Question 4

What does time series analysis involve?

Answer 4

Predicting future levels from past data. The data used are known as time series data.

Question 5

What 4 components can a business identify in time series data?

Answer 5

• The trend: shows the pattern that is indicated from the figures
• Seasonal fluctuations
• Cyclical fluctuations
• Random fluctuations

Question 6

What are the benefits of sales forecasting?

Answer 6

+ 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

Question 7

What factors affect sales forecasting?

Answer 7

• 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

Question 8

What are the difficulties of sales forecasting?

Answer 8

• Data may not be accurate
• Consumer trends can be volatile
• Economic variables can be volatile
• No-one can predict consumer/business confidence

Question 9

What is sales volume?

Answer 9

The amount of sales expressed as a number of units sold

Question 10

What is sales revenue?

Answer 10

The amount of sales expressed as the total sum of money spent by consumers

Question 11

How do you calculate sales volume?

Answer 11

Sales Volume = Sales Revenue / Selling Price

Question 12

How do you calculate sales revenue?

Answer 12

Sales Revenue = Selling Price x Quantity Sold

Question 13

What are fixed costs? Examples?

Answer 13

Costs that stay the same regardless of output, eg rent or managers salaries

Question 14

What are variable costs? Examples?

Answer 14

Costs that change in relation to the number of items produced, eg raw materials

Question 15

How do you calculate total variable cost?

Answer 15

Total Variable Cost = Variable Cost x Quantity

Question 16

How do you calculate total cost?

Answer 16

Total Cost = Fixed Cost + Total Variable Cost

Question 17

What is average cost?

Answer 17

The cost per unit of production, also known as the unit cost

Question 18

How do you calculate average cost?

Answer 18

Average Cost = Total Cost / Output

Question 19

How do you calculate percentage change?

Answer 19

Percentage Change = (New - Original / Original) x 100

Question 20

How do you calculate profit?

Answer 20

Profit = Total Revenue - Total Costs

Question 21

What is contribution?

Answer 21

The difference between selling price and variable costs

Question 22

How do you calculate contribution per unit?

Answer 22

Contribution Per Unit = Selling Price - Variable Cost

Question 23

How do you calculate total contribution?

Answer 23

Total Contribution = Total Revenue - Total Variable Cost

Question 24

What is the break-even point?

Answer 24

When a business is not making a profit nor loss. At this point total costs must be the same as total revenue.

Question 25

What is the break-even output?

Answer 25

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.

Question 26

How do you calculate break-even output?

Answer 26

Break-even Output = Fixed Costs / Contribution

Question 27

What is the margin of safety?

Answer 27

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.

Question 28

What are the uses of break-even analysis?

Answer 28

• 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

Question 29

What are limitations of break-even analysis?

Answer 29

• Output and stocks
• Unchanging conditions
• Accuracy of data
• Non-linear relationships
• Multi-product businesses
• Stepped fixed costs

Question 30

What is a budget?

Answer 30

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.

Question 31

Why have a budget?

Answer 31

• 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

Question 32

What are the two types of budgets?

Answer 32

• Historical figure budget
• Zero based budget

Question 33

What are historical figure budgets?

Answer 33

Using prior data from historical data and adjusted based on future events, estimations and professional judgement

Question 34

What are zero based budgets?

Answer 34

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

Question 35

What are advantages of zero based budgets?

Answer 35

• 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

Question 36

What are disadvantages of zero based budgets?

Answer 36

• 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

Question 37

What is variance analysis?

Answer 37

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.

Question 38

What should a business be doing if variances are adverse?

Answer 38

Questioning what are the reasons and how can you avoid this in future. For example, question suppliers.

Question 39

What should a business be doing if variances are favourable?

Answer 39

Questioning what strategies and systems are working well and how can you continue them. For example, effective advertisement.

Question 40

When do favourable variances occur?

Answer 40

When the actual figures are ‘better’ than the budgeted figures

Question 41

When do adverse variances occur?

Answer 41

When the actual figures are worse than the budgeted figures

Question 42

Why is setting budgets a difficult process?

Answer 42

• 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

Question 43

What are other difficulties of budgeting?

Answer 43

• 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