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Business > 2.2 Financial Planning > Flashcards

2.2 Financial Planning Flashcards

1
Q

What’s a sales forecast

A

Assessing the probable outcome using assumptions about the future

Where you predict the sales of a business in a period of time

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2
Q

What information may a business use in order to carry out a sales forecast accurately

A

Market research e.g market reports and customer surveys

Backdata e.g time series analysis

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3
Q

What is time series analysis

A

Predicting future sales based on last sales figures, taking into account the trend and seasonal fluctuations

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4
Q

What factors affect sales forecasts

A

Consumer trends

Economic variables

Actions of competitors

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5
Q

How to calculate sales revenue

A

Quantity sold x price

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6
Q

How to calculate total costs

A

Fixed cost + variable costs

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7
Q

What are some economic variables

A

Economic growth (GDP)

Interest rates

Inflation

Unemployment

Exchange rates

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8
Q

What are some consumer trends

A

Seasonal variations- sales fluctuate depending on the season or even day of the week

Fashions- fashions constantly change and can make it very difficult to carry out accurate sales forecasts

Long term trends- fashions may change from season to season but most consumer behaviours change over a longer period of time e.g the trend towards solar powered energy

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9
Q

Why would a business have to change it sales forecasts because of the actions of competitors

A

For example if a big competitor were to launch a sales promotion, introduce a new and improved product line or open a new branch nearby, a business could rightly expect sales to fall

Similarly the closure of a large competitor might lead to an increase in sales as the business picks up trade from the switching customers

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10
Q

What’s the purpose of sales forecasts

A

Can plan our resources including Human Resources, stock and impact on finances

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11
Q

What are the problems with sales forecasting

A

Volatile customer tastes and preferences

Subjective expert opinions- many forecasts will be supported by the opinions and experience of a manager within the business

Fluctuations in economic variables- unforeseen external shocks such as changing commodity prices

The data used - the quality of the data a business uses may vary considerably

Volatile markets- some markets are more volatile and unpredictable than others

If you do market research it should limit the risk, easier to predict short term-> particularly the case for a dynamic market but it’s better to have some sort of prediction

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12
Q

Benefits of sales forecasting

A

Informs cash flow forecasts- aids in providing the ‘sales’ or ‘revenue’ figures for the cash flow forecasts

Allows the business to plan orders of supplies and components

Ensures they have the correct staffing levels

Ensures the business had the correct capacity to meet projected orders

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13
Q

How to calculate sales volume

A

Sales revenue
_____________
Price

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14
Q

What is sales revenue

A

Income from sales

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15
Q

How to increase sales revenue

A

Increase sales volume

Increase price of PED is inelastic

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16
Q

What’s a fixed cost

Eg

A

One that doesn’t change with output

Rent, interest on a bank loan

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17
Q

What are stepped fixed costs

Eg

A

When costs may go up but it has nothing to do with output

Eg rent may go up

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18
Q

What’s a variable cost

Eg

A

One that changes with output. The more you produce the higher the cost

Eg raw materials

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19
Q

How do you calculate total variable costs

A

Variable cost per unit x output

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20
Q

How to decrease costs

A

Change supplier- trustworthy, prices, quality, contacts, proximity, trade credit agreements

Reducing waste - efficiency

Move locations - cost, Human Resources

Delayering

Buying in bulk- lowers unit costs

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21
Q

How to calculate profit

A

Total revenue - total costs

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22
Q

How to increase sales volume

A

Advertising - social media, sales promotions, sponsorships, TV/ radio

USP

Differentiate

Add value

Cheaper price

Competitors

Change/ add new markets- selling abroad/ new shops

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23
Q

What do you need to consider when increasing sales volume

A

Cost

Target audience

Ethical considerations

Finance

Return on investment

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24
Q

What is the average cost / unit cost

A

The cost per unit of production. It determines the profit margin. The larger the output the lower the unit cost

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25
Q

How to calculate average cost

A

Total cost
__________
Output

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26
Q

What’s a favourable outcome

A

Actual sales are higher than predictions

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27
Q

What’s an adverse outcome

A

Actual sales are lower than predictions

28
Q

What’s breakeven

A

The point when total revenue is equal to total costs and neither a profit or a loss is being made

29
Q

How to calculate breakeven

A

Fixed costs
___________
Contribution per unit

Answer always given in units

30
Q

What’s contribution

A

The amount of money that contributes towards paying off fixed costs

Also the difference between the variable costs of one unit and it’s selling price

31
Q

How to calculate contribution

A

Selling price- variable cost per unit

32
Q

How to calculate total contribution

A

Total output x contribution per unit

33
Q

Positives of breakeven charts and break even analysis

A

Can see how many products need to be sold to make a profit and whether the business model is realistic

Can be used to analyse the impact of varying customers, prices and costs on a business’s profit

Simple and easy to use

The break even point is a useful guideline to help business make decisions

34
Q

Negatives of break even charts and break even analysis

A

Reliant on market research

Need to calculate accurate costs and revenue

Can get complicated because it simplifies what can be a complex process as most businesses sell multiple products which makes break even more difficult

Might not sell the break even level

Break even focuses on output - presumes that the business will sell all of its output at the same price

Costs are rarely constant and break even analysis presumes that costs stay the same over various levels of output

35
Q

What’s a margin of safety

A

The difference between the break even point and the current level of output.

The size of the margin of safety will determine the risk of the business

the margin of safety should be as high as possible

36
Q

What can break even analysis be used for

A

To evaluate the potential of a business to make a profit based on its output

Eg a business with a high break even point will have to produce and sell a lot before it starts to make a profit

A small margin of safety could also suggest any negative impact on output or demand could lead to the business making a loss

37
Q

What’s a budget

A

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

38
Q

What’s the purpose of budgets

A

To ensure efficiency in spending

Setting budgets allows large businesses to be coordinated and can be a way of motivating employees who are allocated a budget

39
Q

How is budgeting a process

A

The process by which financial control is exercised in a business

Budgets for revenues, costs and profit are prepared in advance and then compared with actual performance to establish any variances

Managers are responsible for controllable costs within their budgets

Managers take action if adverse variances are regarded as excessive

40
Q

What are the uses of budgets in business

A

Establish priorities and set targets

Turn objectives into practical reality

Provide direction and coordination

Assign responsibilities

Allocate resources

Communicate targets

Delegate without loss of control

Motivate staff

Forecast outcomes

Monitor performance

Control income and expenditure

41
Q

What are the three main types of budget

A

Revenue (or income) budget

Cost (or expenditure) budget

Profit budget

42
Q

What’s a revenue (or income) budget

A

Expected revenues

Broken down into detail ( products/ locations)

43
Q

What’s a cost ( or expenditure) budget

A

Expected variable costs based on sales budget

Expected fixed costs

44
Q

What’s a profit budget

A

Based on the combined sales and cost budgets

May form basis for performance bonuses

45
Q

How is a profit budget constructed

A

Analyse market

Draw up revenue budget

Draw up cost budget

46
Q

What are the problems with budgets

A

A budget is only as accurate as the data on which it’s based

Last trends can be a poor indicator of what is likely to happen in the future, therefore it can be very difficult to forecast sales

New decisions taken by governments and public bodies can affect budgets eg interest rate changes and employment legislation

Unexpected changes in process can impact budgets eg commodity prices

When a budget is unrealistic it loses all value as a motivational tool

Can lead to inflexibility in decision making
Need to be changed as circumstances change

Take time to complete and manage

Can result in short term decisions to keep within the budget

Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers

47
Q

What are the potential drawbacks of budgets and budgeting

A

•Sales forecasting

  • harder when market experiences rapid change eg new technology
  • start up firms find it hard to estimate likely sales and revenues
  • competitor actions difficult to predict

•costs

  • always likely to be unexpected costs
  • will vary depending on sales budget
  • changes in external environment will impact costs eg taxes, exchange rates
48
Q

How can budgets create behavioural challengers in a business

A

Budgeting has behavioural implications for motivating employees

Budgets are demotivating if they’re imposed rather than negotiated

Setting unrealistic targets adds to demotivation

Budgets contribute to departmental rivalry battles over budget allocation

Spending up to budget can result in a ‘use it or lose it’ mentality

A ‘name, blame and shame’ culture can develop

49
Q

What’s variance analysis

A

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

A variance arises when there is a difference between actual and budget figures

Variances can be:

Positive/ favourable (better than expected)

Adverse/ unfavourable ( worse than expected)

50
Q

What are favourable variances

A

Actual figures are better than budgeted figure

Eg costs lower than expected

Eg revenue/ profits higher than expected

51
Q

What are adverse variances

A

Actual figure worse than budget figure

Eg costs higher than expected

Eg revenue/ profits lower than expected

52
Q

What are the possible causes of favourable variances

A

Stronger demand than expected-> higher actual revenue

Selling prices increased higher than budget

Cautious sales and cost assumptions eg cost contingencies

Better than expected productivity or efficiency

53
Q

What are the possible causes of adverse variances

A

Unexpected events lead to unbudgeted costs

Over spends by budgeted holders

Sales forecasts prove over optimistic

Market conditions mean demand is lower than budget eg competitor actions

54
Q

What happens in an effective budget system

A

Managerial responsibilities are clearly defined

Individual budgets lay down a plan of action

Performance is monitored against the budget

Corrective action is taken if results differ significantly from the budget

Departures from budgets are permitted only after approval from senior management

Unaccounted for variances are investigated

55
Q

What does the significance of a variance depend on

A

Whether is favourable or adverse

Whether it was foreseen

Whether it was foreseeable

How big the variance was- absolute size ( money terms) and relative size (% terms)

The cause

Whether it’s a problem or the result of a long term trend

56
Q

What’s management by exception

A

The name given to the process of focusing on activities that require attention + ignoring those that appear to be running smoothly

Budget control And analysis of variances facilitates management by exception since ur highlights areas of business performance which aren’t in line with expectations

57
Q

Who are budgets usually used by

A

Both large and small businesses.

Small business owners often underestimate the importance of financial control when running their business and budgeting is a method of control that could easily be employed. This might help avoid problems in the future

58
Q

What specific purposes do budgets fill

A

Control and monitoring- by setting objectives and targets. How successful the business has been can be found by comparing actual results with budget

Planning- forces management to think ahead

Co-ordination- larger business can be complex with many departments and may be spread across the world

Efficiency- in a business with many workers it’s important for management to empower staff by delegating decision making. Budgeting gives financial control to lower levels of management

Motivation- budgeting should act as motivator to the workforce by providing targets

59
Q

What’s zero based budgeting

A

When historical data is not available a zero based budget might be adopted

With ZBB the opportunity costs 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.

60
Q

What are some advantages of ZBB

A

The allocation of resources should be improved

A questioning attitude is developed which will help to reduce unnecessary costs and eliminate inefficient practices

Staff motivation might improve because evaluation skills and practices and a greater knowledge of the firms operations might develop

Encourages managers to look for alternatives

61
Q

What are some disadvantages of ZBB

A

Time consuming as the budgeting process involves the collection and analysis of quite detailed information so spending decisions can be made

Skilful decision making is required. Such skills may not be available in the organisation. In addition, decisions may be influences by subjective opinions

It threatens the status quo. This might adversely affect motivation

Managers may not be prepared to justify spending on certain costs. Money, therefore may not be allocated to spending which could benefit the business

62
Q

How do businesses deal with possible problems of ZBB

A

A business might give each department a ‘base’ budget.

Departments could then be invited to bid for increased expenditure on a ZBB basis

63
Q

What’s budgeting/ budgetary control

A

Involves a business using budgets to look into the future, stating what it wants to happen and deciding how to achieve these aims

64
Q

What are the stages the control process/ in budgetary Control

A

Preparation of plans - all businesses have objectives. Targets are usually set which allows the business to see whether its objectives have been met. The results can then be compared with the targets set

Comparisons of plans with actual results- control will be effective if information is available as quickly as possible. At the end in the period the actual results can be compared with targets set in the budget

Analysis of variances- most important stage. It involves trying to find reasons for the differences between actual and expected financial outcomes.

65
Q

What’s a variance

A

A variance in budgeting is the difference between the figure that the business has budgeted for and the actual figure.

They’re usually calculated at the end of the budget period as that’s when the actual figure will be known

They can be favourable or adverse

Managers will examine variances and try to identify reasons why they have occurred. By doing this they might be able to improve the performance of the business in the future

66
Q

Examples of variances?

A

Wages, materials, overheads and sales revenue

67
Q

What are the difficulties of budgeting

A

Setting budgets- problems may arise as figures in budgets aren’t actual figures. The figures are plans based on historical data, forecasts or human judgement. The most important data in the preparation of nearly all budgets is sales data. If this is inaccurate, many of the firms budgets will be in exact. Setting budgets may lead to conflict between staff/ department

Manipulation- budgets can be manipulated by managers to make it easy to achieve so they look successful but it won’t be helping the business much

Motivation- in some businesses, workers are left out of the planning process. if workers aren’t consulted about the budget it could be difficult to use it to motivate them

Rigidity- budgets can sometimes constrain business activities. Eg departments may have different views about replacing vehicles- the newer vehicles will have lower maintenance costs but the replacing them will be high cost

Short terminism- some managers nught be too focused on the current budget and may take actions that undermine the future performance of the business just to meet current budget targets. It may save costs now but could lead to customers drifting away due to poor service

Business (18 decks)

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