Financial planning 2.2 Flashcards
What is the definition of a sales forecast?
A prediction of how many sales you will make over a period of time.
What does a sales forecast include?
A human resources plan, Production plans, cash flow forecasts, helps a business to focus market research and shows profit forecasts.
3 factors that affect the accuracy and reliability of a cash flow forecast
Consumer trends, economic variables and competitor actions
How do consumer trends affect accuracy and reliability?
Demand changes from fashion tastes and consumer trends, affects market demand and the market share.
How do economic variables affect accuracy and reliability? Use interest rates and exchange rates as an example.
If interest rates where to decrease, this would incentivise people to buy as the reward for saving is lower. If exchange rates were to increase, this would mean imports are cheaper and exports are dearer.
How do actions of competitors affect accuracy and reliability? Use competitors exiting and entering the market as an example.
If their are new competitors exiting and entering the market, this would impact the market share that each business owns and the sales of each businesses.
What is the main difficulty with sales forecast?
Sales forecasts cannot predict the future as this is unknown and unpredictable. COVID-19 for example impacted businesses massively but businesses had no way of predicting this.
What are 2 main problems with sales forecasts for new businesses?
1) Most methods rely on past data
2) New businesses have no past data.
What is the 3 main purpose of a sales forecast?
Predict cash inflows, estimate potential demand, set budgets.
What is meant by sales revenue? Express the formula.
The value of sales from selling goods and services.
Revenue = quantity supplied x selling price.
What is meant by sales volume? Express the formula.
The amount of sales expressed as a number of units sold.
Volume = revenue/selling price.
What is a fixed costs and give examples.
A fixed costs remains the same regardless of the output. Examples include machinery, advertising campaigns, rent and salaries.
What is a variable costs and give examples.
A variable costs is a cost that changes with the number of items produced. Examples include wages, raw materials and costs of productions.
Another name for fixed costs…
Indirect costs, expenses and overheads.
Another name for variable costs…
Direct costs, costs of production.
What is the formula for total costs?
Fixed costs + variable costs = total costs
How do you calculate contribution per unit?
Average selling price - variable costs per unit
What is contribution?
The money that is needed to cover fixed costs. If there is more contribution than fixed costs then the business makes a profit.
How do we calculate break even output?
Fixed costs/contribution per unit
What is the margin of safety?
The difference between the total level of planned output - break even level of output
Some Limitations of break even
Break even assumes that variable costs remain constant meaning the business may be hit with unexpected costs such as machinery repairs, assumes all stock will be sold (doesn’t include external factors like weather), assumes selling price remains the same (increase in competitors or cost of productions)
What is the definition of a break even output
When total costs equal total revenues
What is the definition of budgeting?
A budget is a financial plan for the future concerning the revenues and costs of a business.
What is the purpose of budgeting?
Allows a business to manage its expenses and to assign a certain amount of money into each department. Measure, control, motivate, set targets and manage expenses.
What are 2 types of budgeting?
Historical budget
Zero based
Drawbacks of budgeting
Costs - always likely to be unexpected costs
Time consuming
Based on assumption and predictions which are subject to error.
Unrealistic - demotivating
What is variance analysis? What are the 2 types of variande?
Difference between planned and actual budgets.
Favourable - better than what was budgeted
Adverse - worse than what was budgeted
Examples of adverse and favourable
Adverse - low revenues, low profits, high costs
Favourable - high revenues, high profits, low costs
Advantages to budgeting
Improve efficiency, control income and expenditure, monitor performance, communicate targets from management to employees.
How does budgeting motivate staff?
It sets the direction for the business by laying out business goals and objectives and then assigning responsibility to achieve these goals.
How to calculate variance as a %
Variance £ / Forecast £
Historical budgeting
This is when the budget is based on previous year’s budgets. For example, if the budget was underspent in the last year then it will be cut for the present year.
Zero budget
This is when the budget is not based on potential performance rather than previous budgets. Therefore managers must negotiate their budgets and justify why they need a certain amount of money.
What are the benefits of break even output?
- Not as time consuming or costly to collect data
- Can determine how much they need to sell
- Needed for some businesses to persuade how much money they need
What are the drawbacks of break even output?
- Assumes that variable costs are constant
- Assumes all units will be sold
- Data is not always accurate
- Businesses that sell lots of different products struggle0
What are some external reasons for variances in budgets?
- Competitor behaviour
- Changes in the economy
- The cost of raw materials increases
What are the internal reasons for variances in budgets?
- Underestimating internal costs
- ## Changes in the selling price
What are some decisions a business may make on adverse variances?
- Changing the marketing mix
- Motivating employees to work harder
- Get suppliers to charge a lower price
What are some decisions a business may make on favourable variances?
- Set more ambitious budgets next time
- Increase production or take on more staff
