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Business theme 2 > 2.2 financial planning > Flashcards

2.2 financial planning Flashcards

1
Q

What is a sales forecast?

A

Estimating the future sales or costs with accuracy

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2
Q

What four other plans rely on the sales forecast?

A
  1. The human resource plan will need to be based off the expected level of sales - a growth may require more staff
  2. Cash flow forecast will depend on projected sales
  3. Profit forecasts will depend on the level of revenue predicted
  4. Production scheduling will depend on the level of output required.
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3
Q

Factors that affect medium to long term trends:

A
  1. Changing tastes and habits - such as concern for body shape and image
  2. Demographics - the ageing population
  3. Globalisation - more international influence from businesses
  4. Affluence - other people’s attitude towards something
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4
Q

What is economic variables?

A

Lots of products are dependent on the cost of them in relation to consumers real incomes

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5
Q

What three economic variables that could affect a sales forecast?

A
  1. A sharp fall in the pound - making imports more expensive into the UK so more UK produced products are sold
  2. A sharp rise in taxation
  3. Inflation
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6
Q

What are consumer trends?

A

Consumer taste and habits changing over time.

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7
Q

What is a contingency plan?

A

Plans held in reserve in case things go wrong

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8
Q

What is the definition for real incomes?

A

Changes in household incomes after allowing the changes in prices.

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9
Q

What is a trend?

A

A general path that a series of values follows over time, disregarding variations or random fluctuations.

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10
Q

Why is extrapolation a widely used, but a clearly flawed method of forecasting?

A

Extrapolation can only be correct if the future works out exactly the same as the past

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11
Q

What is the definition for revenue?

A

The value of total sales made by a business within a period, usually in one year

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12
Q

What is the calculation for sales revenue?

A

Sales revenue = sales volume X price

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13
Q

What is sales revenue?

A

What the units were sold for

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14
Q

What is sales volume?

A

The number of units sold

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15
Q

Give 4 examples of variable costs:

A
  1. Raw materials
  2. Packaging
  3. Piece rate labour
  4. Commission
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16
Q

Give 4 examples of fixed costs:

A
  1. Rent
  2. Heating and lighting
  3. Salaries
  4. Interest charges
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17
Q

What is a fixed cost?

A

Costs that do not vary directly with the level of output

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18
Q

What is a variable cost?

A

Costs which vary directly with the level of output.

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19
Q

What is the calculation for total cost?

A

Fixed costs + total variable costs = total costs

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20
Q

What is two ways to cut costs for a business?

A
  1. Find cheaper materials supplied

2. Move to cheaper premises

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21
Q

Why do firms care more about sales revenue than sales volume?

A

Costs are covered by revenue not by the number of units you sell

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22
Q

Why might a business want to separate its variable costs from its fixed costs?

A

Because it helps analyse the impact on profit of a change in demand or change in price

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23
Q

Why might a business choose to lower its prices?

A

Because it feels that the increase in sales volume would outweigh the price cut, pushing the revenue up.

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24
Q

What is piece rate labour?

A

Paying workers per item they make - that is without regular pay

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25
Q

What three things are needed for you to work out the breakeven point?

A
  1. The selling price of the product
  2. It’s fixed costs
  3. It’s variable costs per unit
26
Q

What is the breakeven formula?

A

Breakeven output = fixed costs/ (selling price per unit - variable cost per unit)

27
Q

What is the formula for contribution per unit?

A

Contribution per unit = selling price - variable costs per unit

28
Q

What is the formula for total contribution?

A

Total contribution = contribution per unit X quantity sold
What is the formula for profit? (Using the total contribution)
Profit = total contribution - fixed costs

29
Q

What is the margin of safety on the breakeven chart?

A

The amount by which demand can fall before the firm starts making losses. It is the difference between current sales and the breakeven point

30
Q

What is the formula for the margin of safety?

A

Margin of safety = sales - breakeven point

31
Q

What are 3 internal factors causing the breakeven chart to change after business circumstances change?

A
  1. Extra launch advertising
  2. Planned price increase
  3. Using more machinery (and less labour) in production
32
Q

What are 3 external factors causing the breakeven chart to change after business circumstances change?

A
  1. Fall in demand
  2. Competitors actions force price cut
  3. Fuel costs rise
33
Q

Give a limitation of a breakeven chart:

A

It is a static model so doesn’t show sale trends over time

34
Q

What are four other sales forecasting techniques:

A
  1. Moving averages
  2. Extrapolation
  3. Correlation
  4. Test markets
35
Q

What is extrapolation, explain it:

A

It’s an estimation of a value based on extending a known sequence of values/ facts beyond the area where this is known. It’s to infer something which isn’t explicitly stated from previous information. It uses trends from historical data to forecast the future.

36
Q

What is correlation, explain it:

A

A statistical measure that indicates the extent to which two or more variables fluctuate together. You can have a positive and negative correlation. It looks at the strength between 2 variables.

37
Q

What is test markets, explain it:

A

Have an early release of the product to some people. They are a representation of the target market

38
Q

Give 2 advantages and 2 disadvantages of moving averages:

A

+ removes fluctuations
+ easier to predict accurately
- slow to respond to rapid price changes
- sometimes figures are needed

39
Q

Give 2 advantages and 2 disadvantages of extrapolation:

A

+ easy
+ quick
- not very accurate
- dynamic change isn’t included

40
Q

Give 1 advantage and 2 disadvantages of correlation:

A

+ more data than experiments

  • info from data analysis is limited
  • difficult to understand the graph
41
Q

Give 2 advantages and 2 disadvantages of test markets:

A

+ strong prediction of product success
+ can estimate demand for products
- trade secrets are released
- can be very expensive

42
Q

Give three limitations of breakeven analysis:

A
  1. Assumes all output is sold - in low demand time not all could sell
  2. Its for planning rather than a decision making tool
  3. The breakeven analysis assumes the firm sells all output at a single price.
43
Q

Give three advantages for breakeven:

A
  1. Useful for small and newly established businesses where managers may not be able to employ sophisticated techniques
  2. Estimates the future level of output they will need to produce and sell to meet given profit objectives
  3. Profit can be estimated
44
Q

What is breakeven?

A

When a business makes neither a profit or a loss

45
Q

Why is profit so important for businesses? (5)

A
  1. A return on investment
  2. Reward for taking risks
  3. Key source of finance
  4. Measure of businesses success
  5. A motivating factor and incentive
46
Q

Give 4 reasons as to why budgeting is used?

A
  1. To ensure no department or individual spends more than the company expects
  2. To provide a yardstick against which a managers success or failure can be measured
  3. To enable spending power to be delegated to local managers who are in a better position to know how best to use the firms money
  4. To motivate staff in the department - can be used as a basis for assessing staff performance
47
Q

What is the process for constructing a budget? (4)

A
  1. Make a judgement of the likely sales revenues for the coming year
  2. Set a cost maximum which allows for an acceptable level of profit
  3. The budget for the whole company’s costs is broken down by division, department or by cost centre
  4. Budget may be broken down further so each manager has a budget and therefore some spending power
48
Q

What are two ways of setting budgets:

A
  1. Historical budget

2. Zero-based budget

49
Q

Describe historical budgets:

A

It uses last year’s figures as the basis. Minor adjustments will be made for inflation and other foreseeable changes. It does not encourage efficiency and circumstances may change

50
Q

Describe zero based budgets:

A

It sets each departments budget at zero and demands that budget holders, in setting the budget justify all money they ask for. The only main drawback for zero budgeting is that it takes a long time to find reasons to justify why you need a certain budget

51
Q

What are the two best criteria for setting budgets:

A
  1. To relate the budget directly to the business objective, if a company wants to increase sales and market share, the best method may be to increase the advertising budget to boost demand
  2. To involve as many people as possible in the process, people
52
Q

What is variance analysis:

A

Variance is the amount by which the actual result differs from the budgeted figure. You can either have adverse variance or favourable variance.

53
Q

What are the three main types of budget?

A
  1. Revenue (income) budget - expected revenue and sales
  2. Cost (expenditure) budget - expected costs based on sales budget
  3. Profit budget - based on the combined sales and cost budgets
54
Q

Give two negatives of budgeting

A
  1. Can be dependant on the weather - for an outdoor attraction it may have high numbers in summer but on a wet/cold day it may have low numbers
  2. Can cost lots in both terms of time and money
55
Q

Adverse variance definition:

A

A difference between budgeted and actual figures that is damaging to a firms profits

56
Q

Criteria definition:

A

Yardsticks against which success can be measured

57
Q

Expenditure budget definition:

A

Setting a maximum figure on what a department or manager can spend over a period of time, this is to control costs

58
Q

Favourable variance definition:

A

A difference between budgeted and actual figures that boosts a firms profit

59
Q

Income budget definition:

A

Setting a minimum figure for the revenue to be generated by a product, department or manager

60
Q

Zero budgeting definition:

A

Setting all future budgets at £0, to force managers to have to justify the spending levels they say they need in the future

Business theme 2 (12 decks)

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