2.2 Financial planning

Question 1

Define sales forecasting

Answer 1

The process of predicting future sales

Question 2

What is the purpose of sales forecasting

What is it the basis for

Answer 2

To ensure each functional area is able to operate effectively

HR plan - ensure right number and skilled staff are employed
Marketing Budget- How to allocate marketing budget
Profit forecasts and budgets - plan of how much revenue and profit they are expected to make
Production planning- ensuring enough products are made

Question 3

What are factors which effect sales forecasts (consumer trends)

Answer 3

Increase demand
Healthier trends
Demographics
Globalisation
Affluence (richer spend more on luxuries) 
Economic variables
Value of the pound
Changes in taxation 
Inflation

Question 4

What are factors that effect sales forecasts (actions of competitors)

Answer 4

Changing price (competitors can cut price)
Launching new products
Promotional campaigns

Question 5

What is the difficulty of sales forecasting

Answer 5

Can be hard to extrapolate as future outcomes are hard to predict

Question 6

What does sales volume and sales revenue measure

Answer 6

Measures how much a business has sold

Question 7

What is the formula for sales revenue

Answer 7

= Sales volume x selling price

Question 8

Define fixed costs

Answer 8

Are costs which do not change with the businesses level of output
E.g. rent, salaries, advertising spending

Question 9

Define variable costs

Answer 9

Costs that change in direct proportion to the level of output
E.g. Fuel costs, raw materials

Question 10

What is the formula for total costs

Answer 10

Fixed costs + variable costs

Question 11

Define break evenn

Answer 11

The point where a business is selling enough to just cover costs without making a profit

Question 12

What is the formula for break even

Answer 12

= Fixed costs / (selling price - variable cost per unit)

Question 13

What are the three lines on a break even graph

Answer 13

Revenue
Total costs
Fixed costs

Question 14

Define margin of safety

Answer 14

The difference between the actual level of output and the break even level of output

Question 15

What factors can change a break even chart

Answer 15

Selling price change
Variable cost per unit change
Fixed costs change

Question 16

What are the limitations of break even analysis (5)

Answer 16

Assumes all output is sold
Assumes there are no sudden changes in demand
Possibility of inaccurate data
Assumes that the total costs curve is straight, not taking into account economies of scale
A business can sell more than one product

Question 17

Define Budgets

Answer 17

A financial plan for the future concerning the revenues, costs and profits of a business

Question 18

Who is responsible for budgets

Answer 18

Managers are responsible for controllable costs within their budgets

Question 19

What are the uses of budgets in a business

Answer 19

Set targets and objectives 
Assign responsibilities 
Allocate resources 
Communicate targets 
Motivate staff
Forecast outcomes 
Control income and expenditure

Question 20

What are the three main types of budgets

Answer 20

Revenue budget : expected revenue
Cost budget : expected variable and fixed costs
Profit budget : based on the combined sales and cost budget

Question 21

How a profit budget constructed

Answer 21

Analyse the market (market size and share)
Draw up revenue budget (sales forecast, new products and changing prices)
Draw up the cost budget(include contingencies, based on sales budgets)

Question 22

What are the potential drawbacks of budgeting

Explain them

Answer 22

Sales forecasting - market experiences rapid change, hard to estimate sales and revenue, competitor actions difficult to predict

Costs - likely to be unexpected costs, varies depending on sales budgets, changes in environment will impact costs

Question 23

What is variance analysis

Answer 23

Involves calculating and investigating the differences between actual results and the budget

Question 24

What are favourable variances

Answer 24

When the actual figures are better than the budgeted figure

Question 25

What are adverse variances

Answer 25

When the actual figures are worse than the budgeted figure

Question 26

What is the variance analysis when the budgeted operating profit was £15000 and the actual operating profit was £12000

Answer 26

Actual 12,000 - budgeted 15000 = 3,000 adverse finance

Question 27

What are the possible causes of favourable variances

Answer 27

Stronger demand than expected
Selling price increased higher than budget
Cautious cost assumptions
Better than expected productivity

Question 28

What are the possible cause of adverse finance

Answer 28

Unexpected events leads to un budgeted costs
Overspending by budget holders
Sales forecasts are over - optimistic
Market conditions means demand is lower than budget

Question 29

What ate the two types of budgets

Answer 29

A historical budget : using last years budget as a guide then making adjustments

A zero based budget : setting budget at 0 and budget holders justify budgets, very time consuming

Question 30

Why do smaller businesses not use budgeting

Answer 30

Because it is to time consuming

Question 31

What is the formula for margin of safety

Answer 31

Actual output - Break even level of output

Question 32

Define capital gain

Answer 32

Is the profit made from selling a share for more than it was bought

Question 33

Give the formula for budget variance

Answer 33

Budgeted amount - actual amount