2.2 - Financial Planning

Question 1

Sales forecasting

Answer 1

Predicting future revenues based on past sales figures.

Question 2

Factors affecting sales forecasts

Answer 2

Consumer trends.
Economic variables.
Actions of competitors.

Question 3

Cash flow forecast

Answer 3

A prediction of future inflows and outflows.

Question 4

Difficulties of sales forecasting

Answer 4

The future does not always mirror the past.
Too much data
Interpretation - not fully reliable.

Question 5

Sales volume

Answer 5

The number of units sold by a business.

Question 5

Sales revenue

Answer 5

The value of units sold by a business
Selling price = no of units sold

Question 6

Fixed costs

Answer 6

Costs that do not change as the level of output changes.

Question 7

Variable costs

Answer 7

costs that vary directly with the output.

Question 8

Total costs

Answer 8

The sum of total fixed costs and total variable costs

Question 9

Economies of scale

Answer 9

Occurs when an increase in the scale of output results in a lower cost per unit.

Question 10

Diseconomies of scale

Answer 10

Occurs when an increase in the scale out output results in a higher cost per unit.

Question 11

Contribution

Answer 11

Refers to a product’s selling price minus the variable costs directly involved in producing that unit.

Question 12

Breakeven point

Answer 12

Where the total revenue earned for a product is exactly equal to its costs and where the business is making neither a profit or loss.

Question 13

Break even point calculation

Answer 13

Fixed costs / contribution

Question 14

Break even chart

Answer 14

Visual representation of the break even point.
Used to identify fixed costs, total costs and revenue over a range of output.

Question 15

Limitations of break even analysis

Answer 15

Assumes all output is sold
Accuracy relies on quality of data
Revenue and total costs do not always have a linear relationship with output.

Question 16

Budget

Answer 16

A financial plan that a business sets about costs and revenue.
Usually closely aligned with the business objective.

Question 17

Historical figure budgets

Answer 17

Based on historical data allowing for factors such as inflation.

Question 18

Zero based budgeting

Answer 18

Requires all spending to be justified, meaning many unnecessary costs can be justified.

Question 19

Variance analysis

Answer 19

A budget variance is a difference between a figure budgeted and the actual figure achieved.
can be favourable = actual figure achieved is better than budgeted figure.
Adverse = actual figure is worse then budgeted figure.

Question 20

Difficulties of budgeting

Answer 20

Take time and skill to set, monitor and review.
Can lead to conflict between different business functions.
Unachievable budgets have a negative impact on motivation.
Can encourage managers to focus on short-term rather than long-term performance.