Financial planning 2.2

Question 1

What is the definition of a sales forecast?

Answer 1

A prediction of how many sales you will make over a period of time.

Question 2

What does a sales forecast include?

Answer 2

A human resources plan, Production plans, cash flow forecasts, helps a business to focus market research and shows profit forecasts.

Question 3

3 factors that affect the accuracy and reliability of a cash flow forecast

Answer 3

Consumer trends, economic variables and competitor actions

Question 4

How do consumer trends affect accuracy and reliability?

Answer 4

Demand changes from fashion tastes and consumer trends, affects market demand and the market share.

Question 5

How do economic variables affect accuracy and reliability? Use interest rates and exchange rates as an example.

Answer 5

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.

Question 6

How do actions of competitors affect accuracy and reliability? Use competitors exiting and entering the market as an example.

Answer 6

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.

Question 7

What is the main difficulty with sales forecast?

Answer 7

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.

Question 8

What are 2 main problems with sales forecasts?

Answer 8

1) Most methods rely on past data

2) New businesses have no past data.

Question 9

What is the 3 main purpose of a sales forecast?

Answer 9

Predict cash inflows, estimate potential demand, set budgets.

Question 10

What is meant by sales revenue? Express the formula.

Answer 10

The value of sales from selling goods and services.

Revenue = quantity supplied x selling price.

Question 11

What is meant by sales volume? Express the formula.

Answer 11

The amount of sales expressed as a number of units sold.

Volume = revenue/selling price.

Question 12

What is a fixed costs and give examples.

Answer 12

A fixed costs remains the same regardless of the output. Examples include machinery, advertising campaigns, rent and salaries.

Question 13

What is a variable costs and give examples.

Answer 13

A variable costs is a cost that changes with the number of items produced. Examples include wages, raw materials and costs of productions.

Question 14

Another name for fixed costs…

Answer 14

Indirect costs, expenses and overheads.

Question 15

Another name for variable costs…

Answer 15

Direct costs, costs of production.

Question 16

What is the formula for total costs?

Answer 16

Fixed costs + variable costs = total costs

Question 17

How do you calculate contribution per unit?

Answer 17

Average selling price - variable costs per unit

Question 18

What is contribution?

Answer 18

The money that is needed to cover fixed costs. If there is more contribution than fixed costs then the business makes a profit.

Question 19

How do we calculate break even output?

Answer 19

Fixed costs/contribution per unit

Question 20

What is the margin of safety?

Answer 20

The difference between the total level of planned output - break even level of output

Question 21

Some Limitations of break even

Answer 21

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)

Question 22

What is the definition of a break even output

Answer 22

When total costs equal total revenues

Question 23

What is the definition of budgeting?

Answer 23

A budget is a financial plan for the future concerning the revenues and costs of a business.

Question 24

What is the purpose of budgeting?

Answer 24

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.

Question 25

What are 3 types of budgeting?

Answer 25

Revenue budgeting (expected revenues), cost/expenditure budgeting (expected fixed and variable costs), profit budget (based on combined sales and cost budgets).

Question 26

Drawbacks of budgeting

Answer 26

Costs - always likely to be unexpected costs
Time consuming
Based on assumption and predictions which are subject to error.
Unrealistic - demotivating

Question 27

What is variance analysis? What are the 2 types of budgeting?

Answer 27

Difference between planned and actual budgets.
Favourable - better than what was budgeted
Adverse - worse than what was budgeted

Question 28

Examples of adverse and favourable

Answer 28

Adverse - low revenues, low profits, high costs

Favourable - high revenues, high profits, low costs

Question 29

Advantages to budgeting

Answer 29

Improve efficiency, control income and expenditure, monitor performance, communicate targets from management to employees.

Question 30

How does budgeting motivate staff?

Answer 30

It sets the direction for the business by laying out business goals and objectives and then assigning responsibility to achieve these goals.

Question 31

How to calculate variance as a %

Answer 31

Variance £ / Forecast £

Question 32

Historical budgeting

Answer 32

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.

Question 33

Zero budget

Answer 33

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.

Question 34

What are the benefits of break even output?

Answer 34

• 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

Question 35

What are the drawbacks of break even output?

Answer 35

• 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

Question 36

What are some external reasons for variances in budgets?

Answer 36

• Competitor behaviour
• Changes in the economy
• The cost of raw materials increases

Question 37

What are the internal reasons for variances in budgets?

Answer 37

• Underestimating internal costs
• ## Changes in the selling price

Question 38

What are some decisions a business may make on adverse variances?

Answer 38

• Changing the marketing mix
• Motivating employees to work harder
• Get suppliers to charge a lower price

Question 39

What are some decisions a business may make on favourable variances?

Answer 39

• Set more ambitious budgets next time
• Increase production or take on more staff