Financial planning

Question 1

What is a sales forecast?

Answer 1

a projection of future sales revenue, often based on previous sales data

Question 2

What are the four components a business may want to identify from a sales forecast?

Answer 2

• the trend
• seasonal fluctuations
• cyclical fluctuations
• random fluctuations

Question 3

What are the advantages of sales forecasting?

Answer 3

• Informs cash flow forecast and gives clear idea of what cash inflows will be
• Plan orders of supplies and components
• Enables the business to ensure it has correct staff levels
• Enable business to ensure it has the capacity to meet projected orders

Question 4

What are the factors affecting sales forecasts?

Answer 4

• Consumer trends
• Economic variables
• Actions of competitors

Question 5

What are the difficulties of sales forecasting?

Answer 5

The variable nature of consumer tastes and preferences.

Question 6

What is extrapolation?

Answer 6

Forecasting future trends based on past data

Question 7

What is sales volume?

Answer 7

Its the number of units sold by a business, in units (ie: tonnes, number of, litres)

Question 8

How do you calculate sales revenue?

Answer 8

Sales revenue is the value of output by a business.

Sales revenue: price x quantity of output

Question 9

How do you calculate average costs?

Answer 9

output

Question 10

What is contribution and how do you calculate it?

Answer 10

Contribution is the amount of money left over after variable costs have been subtracted from revenue. It CONTRIBUTES towards fixed costs and profit.

Total Contribution: total rev - total variable cost
or
Total Contribution: unit contribution x number of units
Unit Contribution: Selling price - variable costs

Question 11

How do you calculate the break even point?

Answer 11

contribution

Question 12

What is the break even point?

Answer 12

Total fixed costs + total variable costs = total revenue

Question 13

What is the margin of safety?

Answer 13

The range of output over which a profit can be made

Question 14

How do you find the margin of safety?

Answer 14

Its the distance between the break even level of output and the current (profitable) level of output.

Question 15

What are the limits of break-even analysis?

Answer 15

• Assumes all output is sold so output = sales and no stocks are held
• Drawn on a set of conditions - can’t cope with changes
• Effectiveness depends on accuracy
• Multi-product businesses = different variable costs and prices

Question 16

What is a budget?

Answer 16

a quantitative economic plan prepared and agreed in advance

Question 17

What is the purpose of a budget?

Answer 17

• Control and monitor
• Plan
• Co-ordinate
• Communicate
• Motivate

Question 18

What types of budgets are there?

Answer 18

• Historical figures (budgets based on past data)

- Zero-based (no allocation - must be justified spending)

Question 19

What is variance analysis?

Answer 19

The difference between the figure the business has budgeted for and the actual figure.

Question 20

What are the types of variance analysis?

Answer 20

Favourable (F) ; figures better than budgeted

Adverse (A) ; figures worse than budgeted

Question 21

What are the difficulties of budgeting?

Answer 21

• Time spent
• Conflict between departments
• Rigidity
• Short-termism
• Manipulation by managers