7. financial planning

Question 1

what is sales forecasting - short definition

Answer 1

predicting future sales

Question 2

3 reasons why businesses use sales forcasting

Answer 2

1. finance - helps make cash flow forecasts which show when a loan etc. might be needed
2. marketing - if sales are forecast to decline, businesses may launch a promotional campaign to increase sales and cash inflow
3. resources - helps identify all the resources needed, don’t waste raw materials, seasonal changes

Question 3

3 factors that affect predictions for sales forecasting

Answer 3

1. consumer trends - can be predictable like Christmas but can be unpredictable like fashion
2. economic variables - interest rates/unemployment/inflation. if ppl have less money there will be less demand
3. actions of competitors - if a competitor decreases their prices the firms demand may reduce bc the buyers chose the cheaper option

Question 4

sales volume definition

Answer 4

number of units sold in a given time period

Question 5

sales revenue equation

Answer 5

selling price x sales volume

Question 6

total variable costs equaltion

Answer 6

avergae variable costs x quantity produced

Question 7

definition of fixed and variable costs

Answer 7

fixed - dont change with output (interest on a bank loan is fixed)
variable - rise and fall as output changes

Question 8

profit equation

Answer 8

total revenue - total costs

Question 9

break even definition and equation

Answer 9

the level of sales a business needs to cover its costs
total costs = total revenue
total fixed costs/contribution per unit

Question 10

contribution per unit definition and equation

Answer 10

the difference between the selling price of a product and the variable costs it takes to produce it
selling price - variable cost per unit

Question 11

total contribution definition

Answer 11

this is the contribution from all units sold added together
its used to pay fixed costs and anything then left over if profit

Question 12

margin of safety equation

Answer 12

actual output - break even output

Question 13

advantages of break-even analysis

Answer 13

• easy to do if plotted on a graph accurately
• its fast - managers can respond fast if needed
• businesses can use break-even analysis to persuade sources of finance to give them money
• help influences decisions on weather new products should be launched or not

Question 14

disadvantages of break-even analysis

Answer 14

• assumes variable costs rise steadily - not always true
• simple for a single product but adding more gets very confusing
• if data is inaccurate then results completely wrong
• assumes the business sells all the products with no waste