2.2 - Financial Planning

Question 1

Purpose of sales forcecasts (4)

Answer 1

• HR plan - ensure the right number of staff are employed (in the medium and long term) and that the staff are actually working (in the short term)
• Marketing budgets - firms needs to know if they should boost or revive sales of a particular product or service
• Profit forecasts and budgets - helps shape expectations of spending
• Production planning - a firms needs to ensure enough products are made to satisfy demand and enough raw materials are made this takes place backwards from sales forecasts

Question 2

Factors affecting sales forecasts (3)

Answer 2

• Consumer trends
• Economic variables
• Actions of competitors

Question 3

Factors affecting sales forecasts - consumer trends (2)

Answer 3

• Demand for the product can be affected by changing customers tastes and fashions - this may affect the market size or a particular firm’s market share
• E.g increased demand for more convenient foods or a trend towards healthier eating for some consumers

Question 4

Factors affecting sales forecasts - economic variables (3)

Answer 4

• Value of the pound - A decrease in value makes imports more expensive pushing consumers towards UK-produced products
• Changes in taxation - taxes on individual items such as petrol or alcohol, can affect demand as well as changes in VAT
• Inflation - consumer would need to spend less if inflation is higher than the rate of increase of average incomes this could damage potential sales of some products and services

Question 5

Factors affecting sales forecasts - actions of competitors (3)

Answer 5

• Changing price: if a rival firms undercuts prices (depending on the price elasticity) that rival firm can steal sales potentially making a sales forecasts too optimistic.
• Launching new products: a competitor launching a new product can have a dramatic effect on forecasted sales
• Promotional campaigns: Competitors running successful Promotional campaigns to try to steal market share which could further leave sales forecasts looking too optimistic

Question 6

Difficulties of sales forecasts

Answer 6

Many sales for cats use a technique called extrapolation meaning assuming that past rends will continue - however there are many reasons why trends may change

Question 7

Formula for sales revenue

Answer 7

Sales revenue = selling price x sales volume

Question 8

Formula for sales volume

Answer 8

Sales volume = sales revenue / selling price

Question 9

Formula for total variable cost

Answer 9

Total variable costs = variable cost per unit x output

Question 10

Formula for total costs

Answer 10

Fixed costs + variable costs

Question 11

Formula form total fixed costs

Answer 11

Fixed cost per unit x output

Question 12

Formula for contribution per unit

Answer 12

Selling price - variable costs per unit This figure can be used to calculate break-even

Question 13

Formula for break even

Answer 13

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

Question 14

Formula for break even point

Answer 14

Total fixed costs + total variable costs = total revenue

Question 15

Margin of safety (3)

Answer 15

• Is the horizontal distance between actual output of a business and its break-even output
• This shows how far demand can fall before the firm slips into a loss-making position
• It can be a vital figure to look out for during difficult trading periods

Question 16

Interpretation of break-even charts: - what could change (3)

Answer 16

• Variable cost per unit
• Fixed costs
• Selling price

Question 17

Interpretation of break-even charts: (3) - what line would need to be drawn and the direction - the effect this will have on the break-even

Answer 17

• If variable cost per unit changes total costs would need to be drawn - if the direction is up then break-even point will go up
• If fixed costs change the fixed cost and total costs line would need to be redrawn - If the direction is up then the break-even point will be up and if the direction is down then the break even point will be down
• If selling price changes the total revenue line would need to be redrawn - If the direction is up the break even point will be down and if the direction is down the break-even point will go up

Question 18

Limitations of break-even analysis (4)

Answer 18

• Variable costs are assumed to increase constantly - however they may increase more slowly at high levels of output due to bulk-buying
• They also assume that the firm sells all its output in the same time period which may be untrue
• They are also based on a firm selling only one product at a single price
• May not be suited to show the effects of changing external variables in a dynamic market

Question 19

Purpose of budgets (5)

Answer 19

• They focus expenditure on the company’s main objectives for s time period
• Expenditure budgets are set to ensure that no department or individual spends more than the company expects
• All budgets provide a yardstick against which performance be measured
• Expenditure budgets allow spending power to be delegated to local managers , who may understand local conditions better and be better placed to decide how money should be spent at a local level
• Both income and expenditure budgets can help motivate staff

Question 20

Types of budgets (2)

Answer 20

• Historical figures
• Zero based

Question 21

Types of budgets: historical figures (2)

Answer 21

• Is set using last year’s budgets as a guide and then making adjustments based on known changes
• So If 10% more staff have been employed at a branch that branch’s income and expenditure budgets may be increased by 10%

Question 22

Types of budgets: zero-based (3)

Answer 22

• Involves setting each budget to zero each year and then expects each budget-holder to justify a budget figure that they can work to for the coming year • This can be very time consuming • Prevents wastage that occurs if all budgets simply creep upwards year after year under a system of historical budgeting

Question 23

What is variance analysis?

Answer 23

Involves looking back to calculate the difference between a budgeted figure and the actual figure that occurred

Question 24

Two types of variances

Answer 24

• Adverse: the actual figure was worse than the budgeted figure
• Favourable: the actual figure was better for the business than the budgeted figure

Question 25

Variance analysis for when the type of budget is income and the variance is adverse (2)

Answer 25

• The actual figure is lower than the budgeted figure • The effect this then has on the profit is that it will be lower than expected

Question 26

Variance analysis for when the type of budget is income and the variance is favourable (2)

Answer 26

• The actual figure is higher than budgeted figure
• The effect his has on the profit is that it will be higher than expected

Question 27

Variance analysis for when the income is expenditure and the variance is favourable (2)

Answer 27

• The actual figure is lower than the budgeted figure
• As a result the profit is higher than expected

Question 28

Variance analysis for when the income is expenditure and the variance is adverse (2)

Answer 28

• The actual figure is higher than the budgeted figure
• As result profit is lower than expected

Question 29

3 reasons why budget variances can occur

Answer 29

• The original budget was unrealistic
• The target was not met due to factors beyond the budget-holder’s control
• The target was not met due to factors within the budget-holders control

Question 30

Key areas of difficulties when budgeting (4)

Answer 30

• Setting budgets
• Agreeing or imposing budgets
• Failing to understand the causes of a budget variance
• The costs of the system outweighing the benefits

Question 31

Key areas of difficulties when budgeting - setting budgets

Answer 31

It can be hard to ensure targets are set realistically, but also to avoid budgets creeping upwards over time

Question 32

Key areas of difficulties when budgeting - agreeing or imposing budgets

Answer 32

Imposing budgets are far less motivating and effective than giving budget-holders a genuine say in setting their own targets, in agreement with senior managers

Question 33

Key areas of difficulties when budgeting - failing to understand the causes of a budget variance

Answer 33

Blaming a budget-holder for failing to meet a target that turned out to be impossible is a sure-fire way of demotivating that manager

Question 34

Key areas of difficulties when budgeting - The cost of the system outweighing the benefits

Answer 34

In small businesses there is less need for financial control to be delegated as a single boss may be able to keep an eye on all the finances without taking the time to set up a system of budgets

Question 35

Features of break-even charts (4)

Answer 35

• The fixed cost line is flat - shows that they stay the dame at all level of output
• The total cost line shows the effect of adding fixed cost and varianle costs together- it therefore starts on the left at the fixed cost line and moves upwards in line with rate of increase of variable costs
• Total revenue line begins at point (0,0) since no revenue is generated if nothing is sold
• The break-even output is identified by dropping a vertical line down from the point at which total revenue and total costs to read off the amount of output that needs to be sold to cover costs