2.7 Financial Planning Flashcards
Sales Volume definition?
The number of units sold
What is sales revenue (turnover)?
The amount of money made from sales
What are sales forecasts?
Predicting future sales volume and sales revenue based on past sales data and market research
How does sales forecasting help a business make decisions about finance?
Sales forecast help the business generate accurate cash flow forecasts due to sales revenue is usually a firms main source of cash inflow.
How does sales forecasting help a business make decisions about marketing?
The forecast can tell if sales are going to increase or decrease so a business can create a campaign when sales are low.
How does sales forecasting help a business make decisions about resources?
Makes sure the business has all the resources it needs to run
Factors affecting sales forecasting?
. Consumer trends
. Economic variables
. Actions of competitors
How do economic variables affect sales forecasting?
It changes how much money the consumer can spend affecting the sales of a business
How do the actions of competitors affect sales forecasting?
What a competitor does can decrease your sales. E.g they reduce their prices
How do consumer trends affect sales forecasting?
Sometimes they are fairly predictable but at other times they are uncertain
Sales revenue Calculation?
Sales revenue= Selling price X Sales volume
Sales Volume Calculation?
Sales volume= Sales revenue/Sales price
Do fixed costs change with output?
NO!!!
Examples of fixed costs not changing with output
Rent on a factory, basic salaries, new machinery…
What is profit?
The difference between revenue and costs
Calculation for Profit?
Profit = Total revenue - Total costs
What is the break even point?
The level of sales a business needs to cover its total costs
What happens when sales are below the break even point?
The costs are more than the revenue meaning the business makes a loss
What happens when sales are above the break even point?
The revenue exceeds the costs meaning the business makes a profit
Why do established businesses use break even analysis?
When launching new products they use break even analysis to work out how much profit they are likely to make
What is Contribution per unit?
The difference between the selling price of a product and the variable costs it takes to produce it
Calculation for contribution per unit?
Contribution per unit= selling price -variable cost per unit
What is total contribution (contribution from all units) used for?
paying fixed costs and the amount left over is profit
What is the break even point?
Where total contribution= fixed costs
Calculation for Break-even point
Break-even point= total fixed costs/ contribution per unit
What do break even charts show?
Costs and revenue plotted against output
Where is the break even point on a break even chart?
Where the revenue line crosses the total costs line
What is the margin of safety?
it is the amount between actual output and break even
calculation for margin of safety?
Margin of safety= actual output- break even output
Advantages of using break even analysis?
. it’s easy to do (its just plotting figures on a graph accurately)
. It’s quick
. Lets the business forecast how variations in sales will affect costs, revenue and profits.
. Lets the business forecast how variations in priced and cost will affect how much they need to sell.
. helps persuade sources of finance to give them money
. influences decisions on whether new products are launched or not.
Disadvantages of using break even analysis?
. Assumes variable costs rise steadily
. Simple for single products
. If the data is inaccurate, then the results will be wrong
. Assumes the business sells all the products without any wastage
. doesn’t tell you how many units you are going to sell
What do budgets do?
They forecast future earnings and future spending (usually over a 12 month period)
What are income budgets?
They forecast the amount of money that will come into the business as revenue
How do income budgets work?
The business needs to predict how much it will sell and at what price. This is usually done by using previous years sales figures
What are Expenditure budgets?
They predict what the businesses total costs will be for the year (taking into account both fixed and variable costs)
How does the profit budget calculate the expected profit (or loss) for the year?
Income budget - Expenditure budget
