2.2 Financial planning

Question 1

Define sales forecast

Answer 1

Sales forecasts predict future revenues based on past sales figures

Question 2

Factors affecting sales forecast

Answer 2

1. Consumer trends
2. Economic variables
3. Action of competitors

Question 3

Consumer trends that affect sales forecasts

Answer 3

1. Seasonal variations
2. Fashion
3. Long-term trends

Question 4

Economic variables that affect sales forecast

Answer 4

1. Economic growth
2. Inflation
3. Employment
4. Interest rates
5. Exchange rates

Question 5

Actions of competitors that affect sales forecasts

Answer 5

Short term: sales promotion
Long term: Changes to product ranges, Expansion plans

Question 6

Difficulties of sales forecasting

Answer 6

1. The future does not always mirror the past
2. Too much data
3. Interpretation

Question 7

Define Sales volume

Answer 7

Sales volume is the number of units sold by a business

Question 8

Define Sales revenue

Answer 8

Sales Revenue is the value of the units sold by a business

Question 9

Sales revenue formula

Answer 9

Price x quantity

Question 10

Define Fixed costs

Answer 10

Costs that do not vary with the level of output of a business

Question 11

Define Variable costs

Answer 11

Costs that do vary with the level of output

Question 12

Total cost formula

Answer 12

Total fixed costs + Total variable costs

Question 13

Total variable cost formula

Answer 13

Variable cost x quantity

Question 14

Average total cost formula

Answer 14

TC/Q

Question 15

Average variable cost formula

Answer 15

TVC/Q

Question 16

Contribution formula

Answer 16

Selling price per unit - variable cost. per unit

Question 17

Define Break even

Answer 17

The Break Even Point is where a total revenue earned for a product is exactly equal to its total costs

Question 18

Break even formula

Answer 18

Fixed costs/ contribution

Question 19

Define Margin of Safety

Answer 19

The margin of safety is the difference between the actual level of output of a business and its break even level of output

Question 20

Margin of Safety Formula

Answer 20

MoS = Actual level of output - Break even level of output

Question 21

Limitation of Break even analysis

Answer 21

1. Less useful where businesses produce more than one product
2. The accuracy of break even analysis relies upon the quality of data used in break even calculations
3. Break even analysis assumes that all output is sold
4. Charts cannot be easily amended when conditions (e.g. costs and selling price) change
5. Revenue and total costs do not always have a linear relationship

Question 22

What is a budget?

Answer 22

A budget is a financial plan that a business (or department in the business) sets about costs and revenue

Question 23

Reasons for using budgets

Answer 23

1. Planning & monitoring
2. Control
3. Coordination & Communication
4. Motivation & Efficiency

Question 24

Define Budget variance

Answer 24

A budget variance is a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period (e.g. twelve months)

Question 25

Define favourable variance

Answer 25

A favourable variance (F) is where the actual figure achieved is better than the budgeted figure

Question 26

Define Adverse variance

Answer 26

An adverse variance (A) is where the actual figure achieved is worse than the budgeted figure

Question 27

Difficulties of Budgeting

Answer 27

1. The budgeting process can lead to competition and conflict between different business functions 2. Budgeting can encourage managers to focus on the short-term rather than long-term performance 3. Unachievable or ambitious budgets can have a negative impact on motivation 4. Budget take time and skill to set, monitor and review 5. The budget is only as good as the data used to construct it - inaccurate data renders budgets useless 6. Budget-setters have significant influence over the setting and review of budgets