2.2 Financial Planning

Question 1

What is sales forecasting?

Answer 1

Involves a business using a range of techniques and information to predict future sales volumes and values and make decisions eg.purchasing raw materials

Question 2

Explain approaches to sales forecasting?

Answer 2

A business may use a range of information in order to accurately carry out a sales for east such as market research and back data economic forecasts

Question 3

Explain economic variables in relation to sales forecasting?

Answer 3

They influence levels of demand thus, sales in the market eg. GDP, interest rates, inflation, unemployment, exchange rates

Question 4

Explain consumer trends in relation to sales forecasting?

Answer 4

Seasonal variations- sales fluctuate depending on the season or day of the week
Fashions- constantly change and make it hard to carry out accurate sales forecast
Long term trends- most consumer behaviours change over a period of time eg. Solar powered energy

Question 5

Explain actions of competitors to sales forecasting?

Answer 5

Adjust forecast based on competitors actions eg. Competitors launch sales promotion, business expect sales to fall
eg. Closure of competitor, rise in sales

Question 6

What are 5 problems with sales forecasting?

Answer 6

1) fluctuations in economic variables- unforeseen external shocks
2) the data used- the quality of it
3) volatile markets- how unpredictable is the market
4) volatile customer tastes and preferences
5) subjective expert opinions- forecasts supported by opinions and experiences of a manger within the business

Question 7

What is sales volume?

Answer 7

Expressed in units

Question 8

What is sales revenue?

Answer 8

Value of sales made during trading period

Question 9

How can a business increase revenue?

Answer 9

Increasing the price of their products and by stimulating more demand

Question 10

How do you calculate sales revenue?

Answer 10

Price x quantity sold

Question 11

What’s a variable cost?

Answer 11

They change directly with the level of output or sales

eg. Materials

Question 12

What’s a fixed cost?

Answer 12

They don’t change with the level of output or sales

eg. Rent

Question 13

How can a business improve profit?

Answer 13

By reducing either variable costs or fixed costs while maintaining value in their products

Question 14

Explain revenue in relation to measuring success?

Answer 14

Achieving high revenue demonstrates the business has been able to produce a product that is desirable at the right price for consumers

Question 15

What is average cost and how is it calculated?

Answer 15

The cost per unit of production
The unit cost determines the profit margin
The larger the output the lower the unit/average cost
Calculation: total costs / output

Question 16

Explain profit and loss in relation to sales,revenue and costs?

Answer 16

Understanding revenues and costs allows a business to work out its profit or loss

Question 17

How do you calculate profit?

Answer 17

Total revenue - total costs

Question 18

What is meant by break even output?

Answer 18

The point at which a business’ Rev he generated through the sales of its products will cover the total costs
The business is neither making a miss nor a profit

Question 19

What are 4 uses of break even analysis?

Answer 19

1) decide whether a business idea is profitable and viable
2) identify the level of output and sales necessary to generate a profit
3) assess changes in the level of production
4) assess the unit effects of costing and pricing decisions

Question 20

How do you calculate the break even point?

Answer 20

Fixed costs / contribution per unit

Question 21

What is contribution?

Answer 21

The difference between the variable costs of one unit and its selling price

Question 22

How do you calculate total contribution?

Answer 22

Selling price - variable cost per unit

Question 23

What is the margin of safety?

Answer 23

The difference between the break even point and the current level of output
The size will determine the risk of the business, it should be as high as possible

Question 24

How do you calculate the margin of safety?

Answer 24

Current level of output - break even point

Question 25

What are the benefits of break even analysis?

Answer 25

+ used to analyse the impact of varying customers, prices and costs on a business’s profit
+ simple and easy to use
+ break even point is a useful guideline to help businesses make decisions

Question 26

What are the limitations of break even analysis?

Answer 26

• simplifies what can be a very complex process, most businesses sell multiple products which makes it break even more difficult
• costs are rarely constant, it presumes that costs stay the same over various levels of output
• it focuses on output and presumes that the businesses will sell all of its output at the same price

Question 27

What is a budget?

Answer 27

A financial plan for the future in order to drive business decisions and motivate the workforce when used in target setting

Question 28

Why should you set a budget?

Answer 28

Helps achieve financial and wider objectives and ensures efficiency in spending

Question 29

What is historical budgeting?

Answer 29

Budget based on prior data and adjusted based on future events, estimations, professional judgment

Question 30

What is a zero based budget?

Answer 30

Where historical data isn’t available
The opportunity cost of all spending decisions is considered
Any spending has to be justified by the budget holder to ensure all spending is good value for money
It’s time consuming so can be a barrier to decision making but is efficient at minimising unnecessary costs

Question 31

What are the problems with budgets?

Answer 31

• only as accurate as the data in which it is based
• past trends can be a poor indicator of what us likely to happen in the future so it’s a difficult to forecast sales
• new decisions taken by gov. and public bodies can affect budgets eg. Interest rates
• unexpected changes in process eg.commodity prices can impact budgets
• when a budget is unrealistic it loses all value as a motivational tool

Question 32

What is variance analysis?

Answer 32

Compares the forecast data to actual figures in order to analyse the accuracy of the budgeting process and help make decisions about budget adjustments

Question 33

What’s meant by an adverse and favourable variance?

Answer 33

Adverse- actual costs are higher than budgeted

Favourable- actual costs are lower than budgeted