3.3 - Decision making techniques Flashcards
Define Quantitative sales forecasting
Is a statistical technique which uses past data to make predictions about the future, in terms of sales
What does Quantitative sales forecasting allow a business to do
Prepare for potential increases and decreases in demand
Organise production
Organise resources (employees, premises and raw materials)
Organise marketing
Explain what a moving average is and what it consists of
Is a succession of averages derived from successive segments of a series of value. There are three period moving averages (sales average over 3 years) and four quarter moving averages (average sales over 4 quarters of the year)
Explain the use of a line of best fit for QSF
Can be drawn on a QSF graph to see the general trend in sales over the time period to show an overall change in sales
Explain what a scatter graph is
Shows the performance of one variable against another independent variable on a variety of occasions, used to show whether a correlation exists
What are the limitations of quantitative sales forecasts (6)
Past performance is no guarantee of future sales
Businesses also need to take into account SWOT and PESTLE factors which can effect future predictions
Use of moving averages can be outdated
Extrapolating can be inaccurate and unreliable
Is a Time consuming and complex process
In dynamic markets there is rapid change and products have short life cycles , extrapolating may not be appropriate
What is a correlation coefficient
Is used to show the relationship in correlation between two variables.
A +1 means a positive relationship in correlation between the two variables and -1 means a negative relationship
Define a decision tree
Is a technique which shows all possible outcomes of a decision , to analyse the probability of success. Is a quantitative approach
When may a business use a decision tree (3)
A new product launch
A new marketing campaign
Relocation to a new building
Explain a decision point as part of a decision tree
Are points at the start of a decision tree where decisions have to be made, represented by squares
Explain a chance node as part of a decision tree
Are the points where there are different possible outcomes in a decision tree, represented by circles
Explain a probability/chance as part of the decision tree
Is the likelihood of possible outcomes happening , represented by a probability, sourced from backdata
Explain the expected monetary values as part of the decision tree
Give the formula for the expected value
Is the financial outcome of a decision, based on predicted profits or loss
Expected value = success + failure
Give the formula for the net gain in a decision tree
Expected value - cost
Explain the advantages of decision trees for businesses (3)
Constructing the tree diagram may show possible causes of action not previously considered
Involves placing numerical values on decisions, improving results
Force management to take account of the risks involved in decisions
Explain the limitations of decision trees for businesses (5)
Based on predicted data
Does not take into account unforeseen circumstances
Risk of bias when attaching probabilities to outcomes
Time consuming process
Time lags often occur, some numerical information may be out of date
Define critical path analysis
Is a method of calculating the minimum time required to complete a project, identifying delays which could be critical to it’s completion
Explain the critical path
Is the tasks involved in a project which, if delayed, could delay the project. Has no float.
Define the Earliest Start Time for critical path analysis
How is it calculated
Is how soon a task in a project can begin. It is influenced by the length of time taken by tasks which must be completed before it can begin.
Is calculated by using the top right nodes.
Define the Latest Finish Time for critical path analysis
How is it calculated
Is the latest time that a task in a project can finish.
Calculated using the bottom right node
Define a free float for critical path analysis
Is the time by which a task can be delayed without affecting the following task
Define a total float for critical path analysis
Is the time by which a task can be delayed without affecting the project, is not on the critical path.
Define Nodes for Critical Path Analysis
Are positions in a network diagram which indicate the start and finish times of a task
Explain the uses of Critical path analysis (4)
Efficiency- shows tasks can be completed at the same time, saving production and instillation time and use of resources. Highlighting exact delays can help a business to meet deadlines on time and avoid the costs of missing them.
Decision making- is a more scientific and objective way of making decisions. Estimating the time a project will take can be based on past information, the implications of delays can be identified, assessed and prevented.
Time based management - CPA is helpful when managing larger projects that may take weeks, months or years to complete with hundreds or thousands of tasks. Aids planning, organisation and time management.
Working capital control- CPA allows a firm to identify exactly when materials and equipment will be used in a project, allowing them to be purchased when required rather than holding costly stocks, especially important for a JIT production firm.
Explain the limitations of Critical Path Analysis (4)
Information used to estimate times may be incorrect.
Changes can occur during the project which need to be taken into account when producing a network.
With very large projects CPA can become complex with hundreds of thousands of tasks to take into account.
Resources may be inflexible
Give the formula for calculating variation in quantitative sales forecasting
Variation= actual sales/moving average
Define investment
Refers to the purchase of capital goods and expenditure that is likely to yield a return in the future
Define Investment Appraisal
How may it be calculated
Describes how a business might objectively evaluate an investment project to determine whether or not it is likely to be profitable.
There are quantitative methods that a firm might use when evaluating the return of investment that all involve comparing the capital cost of the project with the net cash flow
Define Payback period as a method of investment appraisal
How do you find it
Is a method referring to the time it takes for a project to repay it’s initial investment.
- Find initial cost of investment
- Calculate or find net cash generated from the investment each year
- Calculate cumulative net cash flow
- Identify which year the investment is paid off in
- Find month the investment is paid off in
Give the formula for the payback period
Previous year cumulative net cash flow/ current year net cash/12
Explain the advantages and disadvantages of payback period as a method of investment appraisal
A
Is simple to use and less time consuming
Firms can adopt to this method if they have cash flow problems
Has a focus on risk, compares risk between investments
D
Is not realistic, most investments require further investment
Ignores cash flow which arise of the payback has been reached
May encourage short term thinking
Defined the average rate of return
Measures the net return each year as a percentage of the capital cost of the investment
Give the formula for the average rate of return
Explain the steps to find it
Net return (profit) per year / cost of investment x 100%
- Add all net cash flows over the years
- Minus the original cost of the project
- Divide this number by the number of years the project runs for
- Divide by the cost of the project
Explain the advantages and disadvantages of average rate of return as a method of investment appraisal
A
Looks at the whole profitability of the project, unlike the payback period
Focuses on the profitability of a project
Can be compared to other uses of investment funds (bank savings)
Easier to identify the opportunity cost of investment
D
Ignores the time value of money
Does not consider external factors that can affect profitability of a project
Define Net present value
Is the present value of future income from an investment project, as the value of money decreases over time
Define a discount table
Is used when calculating the NPV, shows by how much a future value must be multiplied to calculate it’s present value
Explain the advantages and disadvantages of Net Present Value as a investment appraisal method
A
Correctly accounts for the value of future earnings by calculating present values
Shareholders are clearly able to see how much a project will make in the long term
Takes into account how external factors can change each year
D
The discount rate is critical in order to be accurate
A higher NPV does not necessarily mean a better investment
