2.2 - Financial Planning Flashcards
Sales Forecast
Estimate of a business’s future sales revenue over a specific period, based on historical data, market trends, and other relevant factors
Purpose of a sales forecast
- Financial planning and budgeting
- Inventory management
- Cash flow management
- Setting sales targets
- Investors and stakeholder confidence
Factors affecting a sales forecast
- Economic factors
- Competition
- Industry trends
- Seasonality
- External shocks
Advantages of a sales forecast
- Improved financial planning
- Informed decision-making
- Risk management
Disadvantages of a sales forecast
- Inaccuracy:
- External factors
- Complexity and time-consuming
Extrapolation
Statistical method used to estimate or predict future values based on historical data
Sales revenue
Total amount of money a business generates from selling goods or services during a specific period
Formula for sales revenue
Price * Quantity
Fixed costs
Business expenses that do not change with the level of goods or services produced by the business. These costs remain constant regardless of the company’s production output or sales volume within a certain period
Variable costs
Expenses that change in direct proportion to the level of production or sales in a business. Unlike fixed costs, which remain constant regardless of activity, variable costs increase as production increases and decrease as production decreases
Profit
Reward for taking risks and making investments
Formula for profit
Total revenue - Total costs
Break even point
Level of sales or revenue at which a business’s total revenues exactly equal its total costs (fixed and variable). At this point, the business is neither making a profit nor incurring a loss
Contribution
Amount of money from each unit sold that contributes towards covering a company’s fixed costs and generating profit.
Formula for contribution per unit
Price - Variable cost per unit
Margin of safety
Difference between actual output and break even output
Advantages of a break even analysis
- Helps determine minimum sales needed
- Guides pricing decisions
- Profitability forecasting
Disadvantages of a break even analysis
- Assumes constant prices and costs
- Ignores external factors
- Assumes constant sales volume
Types of budgeting
- Historical
- Zero based
Historical budgeting
Method of budgeting in which an organisation’s budget is based on past financial performance and trends
Zero based budgeting
Budgeting method where every expense must be justified for each new period, starting from a “zero base.” Unlike traditional budgeting methods that only adjust previous budgets, ZBB requires that all costs, regardless of past budgets, be re-evaluated and approved before being included in the budget
Advantages and disadvantages of historical budgeting
- Provides a benchmark for performance comparison
- Time-saving
- Ignores changing business conditions
- Lack of flexibility and adaptability
Advantages and disadvantages of zero based budgeting
- Eliminates wasteful spending
- Encourages innovation and efficiency
- Risk of bias in decision-making
- Time-consuming and complex
Purpose of budgets
- Financial control
- Planning and decision-making
- Motivation and goal setting
Difficulties in budgeting accurately
- Unpredictable market conditions
- Reliance on estimates and assumptions
- Employee and departmental bias
Favourable variance
When a business’s actual financial performance is better than expected in a budget, meaning revenue is higher or costs are lower than expected
Adverse variance
When a business’s actual financial performance is worse than expected in a budget, meaning revenue is lower or costs are higher than expected
