Chapter 3 - Budgeting

Question 1

Budgeting helps:

Answer 1

1. estimate future cash inflows
2. estimating and adjusting sales to find the cash inflow and to attach risks
3. to invest cash wisely and isolate economic problems, allowing cash and time to be directed at economic rather than technical aspects

Question 2

Approaches to budgeting

Answer 2

1. First budgeting approach considers changes to current requirements. With the past information required known, future budgets can be formulated
2. Second budgeting approach is called zero-base budgeting. Used for a new product and new not exact process, or for a new process for an existing product

Question 3

Product factors

Answer 3

1. the market
2. promotion
3. quality of materials used
4. dependability
5. speed
6. flexibility of getting ideas to the customers

Question 4

Product life cycle

Answer 4

1. Introductory - few people know of the product
2. Growth - as one technology dominates, sales grow quickly
3. Maturity - when the market is appeased it reaches maturity
4. Decline - other products creatively destroy the existing product

Question 5

The 4 P’s

Answer 5

1. Price
2. Product
   — the physical good and its services
   — types of products - convenience, shopping, speciality and industrial
3. Place
   — where the product is sold
   — the supply chain used to distribute the product to customers
4. Promotion
   — informs potential customers about the product and its value, and encourages purchasing
   — may be targeted or general

Question 6

Pricing decisions

Answer 6

— manufacturers using list prices that retailers are expected to maintain
— setting margins between cost and selling price, a range of acceptable prices and free pricing (can sell at any price)

Question 7

Pricing methods

Answer 7

— adding a % to total cost
— set price by comparing competitor’s price
— variable output pricing

Question 8

Price skimming

Answer 8

Charging a high price - attempt to generate high profitability

Question 9

Price penetration

Answer 9

Charging a low price - attempts to grow market and exclude competition

Question 10

Two types of sales forecasts

Answer 10

1. business to business (B2B) markets sales occurs between firms - aka industrial markets, is sometimes like selling in a command economy
2. business to customer (B2C) markets sales occurs directly to the end consumers, is sometimes like selling in a market economy

Question 11

Forecasting process

Answer 11

1. define info and accuracy required
2. explore secondary info
3. determine if accuracy required is sufficient
4. construct a programme to approach people
5. undertake the research
6. check the results

Question 12

Sales forecast research :

Answer 12

Either
— extrapolate the past (secondary market research)
or
— ask people about future intentions (primary market research)

Question 13

Approaches to extrapolating the past

Answer 13

• assume the future is the same as the recent past,
• break forecast into time-base elements (sales = trend x cyclical component x seasonal component x residual, i.e. Y = TCSR)
• leading indicator approach
• causal approach
• probability approaches