2.2 - financial planning

Question 1

What is sales forecasting?

Answer 1

Sales forecasting is about predicting future sale volume and sales revenue based on past sales data and market research.

Question 2

What does sales forecasting help businesses with?

Answer 2

Sales forecasting allows businesses to make decisions about:

• Finance - sales revenue is usually a firms main source of cash indlow so sales forecasts are important to be able to generate accurate cash flow forecasts. Cash flow forecasts help a firm know when it might need more finance to prevent it running out of cash.
• Marketing - firms use different marketing methods to drive sales, so sales forecasts and the actions of the marketing department are linked.
• Resources - how much of a product a firm sells affects how many resources it needs. Sales forecasts can show a business how much of a resource it needs.

Question 3

What are the external factors that can affect sales?

Answer 3

• consumer trends
• economic variables (interest rates, inflation, unemployment levels)
• actions of competitors

Question 4

What is sales volume

Answer 4

Sales volume is the number of units sold in a given time period.

Question 5

What is the formula for sales volume

Answer 5

Sales volume = sales revenue / selling price

Question 6

What is the formula for sales revenue

Answer 6

sales revenue = selling price x sales volume

Question 7

What are the 2 types of costs?

Answer 7

Fixed costs - these do not change with output. Rent, business rates, salaries, new machinery. The cost of these facilities do not change with an increase in output.

Variable costs - variable costs rise and fall as output changes. Hourly wages, raw material costs, packaging costs are all variable costs.

Total costs = fixed + variable costs

Question 8

What is the break even point?

Answer 8

The break even point is the level of sales a business needs to cover its total costs.

Question 9

Why should new businesses use a break even analysis?

Answer 9

New businesses should always do a break even analysis to find the break even point, since it tells them how much they will need to sell to break even. It also helps get loans from people and banks since it shows them how much a business needs to break even.

Question 10

What is contribution per unit?

Answer 10

Contribution per unit is the difference between the selling price of a product and the variable costs it takes to produce it.

Total contribution is used to pay fixed costs. The amount left over is profit. The break even point is where total contribution = fixed costs.

Contribution per unit = selling price - variable cost per unit

Question 11

What is the break even formula?

Answer 11

Break even point = total fixed costs / contribution per unit

Question 12

What do break even charts do?

Answer 12

Break even charts show costs and revenue plotted against output. Businesses use break even charts to see how costs and revenue vary with different levels of output.

Question 13

What is the margin of safety?

Answer 13

The margin of safety is the amount between actual output and break even.

Margin of safety = actual output - break even output

Question 14

What are the advantages of break even analysis?

Answer 14

• It is easy to do
• It is quick to do
• It allows businesses to forecast how variations in sales will affect costs, revenue and profits
• They can be used to help persuade sources of finance to give the business money

Question 15

What are the disadvantages of break even analysis?

Answer 15

• The analysis assumes that variable costs always rise steadily which isnt accurate
• Break even analysis is for a single product
• If the data is inaccurate then results will be wrong

Question 16

What is a budget

Answer 16

A budget forecasts future earnings and future spending, usually over a 12 month period.

Question 17

What are the 3 types of budgets

Answer 17

• Income budgets - forecasts the amount of money that will come into the business as revenue
• Expenditure budgets - predict what the businesses total costs will be for the year
• Profit budget - uses the income budget minus the expenditure budget to calculate the expected profit or loss for a year.

Question 18

What are the advantages of budgets?

Answer 18

• Budgets can be motivating - gives the employees targets to work towards.
• Budgets help control income and expenditure
• Budgeting helps managers review their activities and make decisions
• Budgeting helps focus on the priorities

Question 19

What are the disadvantages of budgets?

Answer 19

• Budgeting can cause resentment and rivalry if departments have to compete for money
• Budgets can be restrictive
• Budgeting is time consuming
• Inflation is hard to predict.

Question 20

What is zero-based budgeting?

Answer 20

Zero-based budgeting is when start up businesses have to develop their budgets from scratch, since they don’t have much information to base their decisions on.

Question 21

What are the two options of budgeting a business has after the first year?

Answer 21

Historical budgets - historical budgets are updated each year, this years budget is based on a percentage increase or decrease from last years budget.

Zero-based budgeting - Zzero-based budgeting means starting from scratch each year. budget holders start with a budget of £0 and have to get approval to spend money on activities.

Question 22

What are fixed budgets?

Answer 22

Fixed budgeting means budget holders have to stick to their budget plans throughoyt the year, even if the market conditions change.

This can prevent a firm reacting to new opportunities or threats that they didnt know about when they set the budget.

However, fixed buidgets prvide discipline and certainty.

Question 23

What are flexible budgets?

Answer 23

Flexible budgeting allows budgets to be altered in respone to significant changes in the market or economy.

Question 24

What is variance?

Answer 24

Variance is the difference between actual figures and budgeted figures.

A variance means the business is performing either worse or better than expected.

A favourable variance occurs when a firm is performing better than expected.

An adverse variance occurs when a firm is performing worse than expected.

Question 25

What is the formula for calculating a variance?

Answer 25

Variance = actual figure - budgeted figure

Question 26

What are the external factors that can cause variances?

Answer 26

• Competitor behaviour and changing fashions may increase or reduce demand for products
• Changes in the economy can change how much workers’ wages cost the business.
• The cost of raw materials can go up

Question 27

What are the internal factors that can cause variances?

Answer 27

• Improving efficiency causes favourable variances.
• A firm might overestimate the amount of money it can save by streamlining its production methods
• A firm might underestimate the cost of making a change to its organisation
• Changing selling price changes revenue which creates variance if it happens after the budgets set
• Internal causes of variance are a big concen, they suggest internal communication need improving.