3.3 Flashcards
sales forecasting
prediiting future sales volume/revenue based on past sales data and market research
how does sales forcasting help the finance function
helps to produce cash flow forecasts to help identify if more finance is needed
how does sales forcasting help the marketing function
marketing department knows periods that sales are predicted low, socan plan on how to increase
how does sales forcasting help the operations function
know amont of people needed to produce stock
how does sales forcasting help the HR function
understand that high volume may cause stress and absenteeism
Time series data
Sales figures that have been collected at consistent time intervals and presented in time order.
Advantages of scatter graphs to find correlations
- can identify if 2 two variables could be correlated
- if data suggests strong correlation, marketing predictions can be used to make sales forecasts
Disadvanteges of scatter graphs to find correlations
- weak correlations or non correlation makes it hard to forecast sales
- even though a correlation is identified it doesnt necessarily mean theres a casual link between the two.
Extrapolation
Using trends in past sales data to forecast future sales
Advanatages of extrapolation
Useful in stable environments where the size of the market or number of competitors are unlikely to change
Disadvantages of extrapolation
Past performance does not gurantee sales performance will continue in the future
how to calculate payback
Calculate annual net cash flow of project (inflows - outflows)
Calculate the cumulative net cash flow
(net cash flow of previous year + net cash flow of year)
Identify the year pay back was achieved
(cumulative cash flow of last negative year / net cash flow of positive year after that x 12)
advantages of pay back
- Quick and simple
- good for business with cash flow problems
- good for businesses whose equipment may become obsolete
Disadvantages of Payback
- Ignores overall profit generated
- ignores the timings of receipts
- Not always accurate
What is Payback
The length of time it takes to pay back the initial cost of an investment
Average Rate of return
How much of the investment cost is returned as annual profit
How to calculate ARR
- Calculate overall profit from investment by adding up all net cash flows (same as final cumulative cash flow)
- Calculate average annual profit by dividing overall profit by number of years which investment generates a return
- annual average profit/ initial investment x 100
Advantages of ARR
- focuses on the overall profitability of an invesment
- can be compared to other forms of investment
Disadvantages of ARR
- doesn’t take into account timings of the cash flow
- doesn’t take into account the effect of receiving money in the future has on the value of money
Net present value
How much the profit is worth in the future years
How to calculate net present value
(Net cash flow year 1 x discount factor) + (Net cash flow year 2 x discount factor)….. Minus Initial cost
Advantages of NPV
- simple to interpret (positive = go ahead , negative = reject)
- takes into consideration the time value of money
Disadvantages of NPV
- ignores the speed of repayment of the original investment
- difficult to choose correct discount factor
- can be difficult to understand
Decision Trees
Mathematical models representing the likely outcomes for a business of a number of courses of action, showing the financial consequences of each
Descision trees expected values
(Outcome 1 x Probability) + (Outcome 2 x Probability)…..
Descision Trees Net gain
Expected Value - Cost
Advantages of Decision Trees
- Makes managers think about different options and consequences that may not have been considered before
- Less rushed descision making process
- Quantifys cost, benefit and probability
- Provide logical comparison of options to managers
Disadvantages of decision trees
- Only include financial and quantitative data
- Use estimates for probability and financial consequences for each outcome
- The range of possible outcomes not always clear
Critical Path Analysis
Identifys the most efficient and cost effective way of completing a complex project
CPA requires a business to
- identify all key activities that make up the project
- Identify order in which they must occur in order to get the plan implemented
- estimate duration of each activity
CPA earliest start time
Earliest start time of preceding activity + duration of preceding activity
CPA latest finish time
Latest finish time of the following activity – the duration of that activity
CPA float time
Latest Finish Time – Activity length – Earliest Start Time
Benefits of CPA
- helps reduce risk and costs of complex projects
- encourages careful assessment of the requirements of each activity in a project
- helps spot which activities have some float and could therefore transfer some resources
Drawbacks of CPA
- reliability of CPA largely based on accurate estimates and assumptions made
- doesn’t guarantee success
- recourses may not be flexible as management hopes
