Paper 1- Theme 2.2- Financial planning (3.31 in ere) (define time series analysis)

Question 1

define sales forecasting

Answer 1

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

Question 2

define forecasting

Answer 2

forecasting is when a business assesses the probable outcome using assumptions about the future

Question 3

purpose of sale forecasts

Answer 3

• used in cashflow forecasts (estimate inflows/receipts)
• used in HR to estimate no. of staff that need to be employed [capacity needs]
• used in production planning (how much stock to buy). [capacity needs]
• forms basis of business aims and objectives (judge companies success)
• used to set budgets
• used for investment appraisal models

Question 4

how are sales forecasts derived

Answer 4

•using correlation
-understanding the relationship between two variables (e.g. any internal or external influences and future sales) can help predict future sales

•using past sales data
-extrapolate previous data to predict future sales

Question 5

Factors that affect a sales forecast

Answer 5

• Consumer trends- tastes could change which could lead to market demand and overall decreased market share
• Economic variables -seasonal changes in demand
• competitors actions can’t be predicted
• nature of product - essential or luxury?
• legal changes

Question 6

Challenges with forecasting sales

Answer 6

• dynamic and changing markets (previous data becomes inaccurate)
• high levels of price elasticity of demand
• quality of management and their ability to be non biased and forecast accurately
• new business have no previous data
• manager may be over enthusiastic and overestimate the sales figures

Question 7

Define correlation

Answer 7

statistical technique used to establish the strength of the relationship between two variables

Question 8

Define extrapolation

Answer 8

method where you predict future levels of sales through analysing trends in past data and projecting this into the future

Question 9

Positives and negatives of extrapolation

Answer 9

POSITIVES

• easy to implement
• accurate as based off up your own past sales
• quantitative target for sales

NEGATIVES

• doesn’t account for change in trends or demand
• assumes business will continue as they did in past
• not useful for dynamic markets

Question 10

Define Moving average

Answer 10

statistical calculation of an underlying trend in data

Question 11

Positives of using moving averages

Answer 11

• useful for analysing and understanding erratic or seasonal data
• smooths out peaks and troughs in seasonal demand and so can see true sales figures

Question 12

define contribution

Answer 12

how much revenue generated goes towards covering the fixed costs and then the profit

Question 13

total contribution =

Answer 13

total contribution = Total Revenue - Total Variable Costs

total contribution = contribution per unit x output
cpu x output

Question 14

Break even output

Answer 14

break even output = fixed costs
————————————
contribution per unit

Question 15

Margin of safety =

Answer 15

Margin of safety = no. of units sold - break even output

Question 16

Drawbacks of break even

Answer 16

STRENGTHS
- variable costs don’t always stay the same (drop due to EoS or rise due to demand increase)

• static model- doesn’t take sale trends into consideration
• assumes all output is sold (waste, obsolete stock) -and for all the same price (discounted bulk orders)

Question 17

Benefits of break even

Answer 17

• can test feasibility of a business idea or product easily
• calculations are quick and easy
• business can calculate how much of cushion it has between being profitable and breaking even

Question 18

Define a budget

Answer 18

-financial plan for the future, in terms of costs and income over a period of time

Question 19

Three things budgets can focus on

Answer 19

• revenue budget (expected sales)
• cost budget
• profit budget (combine cost and revenue budgets)

Question 20

purpose of budgets

Answer 20

• provide an amount that success can be measured against
• ensure no department is overspending
• forecast your profits (know how much can be reinvested)
• effective allocation of resources
• enable local managers to have spending power as they know where best to use the money (speed up decision making)

Question 21

two types of budget

Answer 21

historical

zero budgeting

Question 22

define historical budgeting

pros and cons

Answer 22

whatever you had last year is reallocated (+inflation)

pros: based on actual results
cons: doesn’t encourage efficiency, may feel obliged to spend the full amount so you have access to same amount next year, may force people to be more short term (budget is yearly)

Question 23

define zero based budgeting

pros and cons

Answer 23

• each year you start at zero and budget is based off new proposals put to the manager
  pros: prevents gradual increase of budgets each year, less complacency
  cons: hard to find good reasoning for small sum differences , time consuming, potential bias to better pitchers