Sales revenue and costs Flashcards
sales volume
formula
the amount of sales expressed as number of units sold
sales revenue/selling price
sales revenue
formula
formula #2
amount of sales expressed as the total sum of money spent by customers
selling price X quantity sold
selling price X sales volume
revenue
formula
money coming in from selling of goods and services
selling price X quantity sold
fixed costs
variable costs
TVC formula
TC formula
costs that don’t change as a result of change in output in the short run
production costs which increase directly as output rises
variable cost per unit X output
FC+VC
average cost
formula
profit
semi variable costs
cost per unit of production
total cost/output
total revenue-total costs
costs that consist of both fixed and variable costs
ways to improve sales revenue
advertising
promotion
increased targeting
extend product range
extend distribution networks
develop relationships w custemors
ways to improve sales revenue
changing prices
adding complementary services/products
sales forecasting
prediction of future sales volume and trends often based on previous sales data
factors affecting sales forecasting
consumer trends
economic variable:
interest rates, employment, exchange rates, inflation
Competitors :
comp entering or exiting the market
will impact on market share and therefore sales
Changes in price and promotion
(e.g. what if a competitor lowers price or increases promotional activities?)
Competitor is better able to respond to consumer trends
Difficulties in sales forecasting
By definition the future is unknown and therefore uncertain
Changing external environment
Unpredictable events
Time frame
Past is not a clear indication of the future
Lack of perfect information
1)consumer income
2)consumer trends
3)economic growth
4)economic variables
5)extrapolation
6)forecasting
7)time series data
6) a business process, assessing the probable outcome using assumptions about the future
break even
- at this point….
break even output
contribution+formula: contribution per unit and total contribution
profit=
point at which a business is generating just enough profit to cover total costs
…TR=TC
output a bus must produce so that revenue covers costs
the amount of money left after variable costs have been subtracted from revenue
=selling price - variable cost
=total revenue - total variable cost OR unit contribution X numb of units sold
total contribution - fixed costs
break even=
margin of safety
formula
fixed costs/contribution
the range of output between the break even level and the current level of output, over which a profit is made
MOS = current output - break even output
limitations of break even analysis
1)assumes all output is sold
2)assumes unchanging market conditions
3)accuracy of data
4)non-linear relationships- eg cost of buying bulk, price of promotion
5)multi-product business-hard to allocate fixed cost for individual product + innacuracy risk
benefits of B.E.A
Allows businesses to calculate the minimum number of sales needed before starting to make a profit and therefore for see if a venture is viable
Can calculate the level of profit or loss at different levels
Can predict the outcome of changing variables
Provides a target
An integral part of a business plan when seeking to secure finance
Aids decision making
Cash flow forecast
Net cash flow
The prediction of all expected expenses and receipts of a business over a future time period which shows the predicted cash balance at the end of each month
Difference between cash inflows and outflows (in-out)
Opening balance
Closing balance - formula
Solvency
The amount of cash a business has in begging of each month . Month 1= Amount of cash from. Previous trading period then last month’s closing balance
Amount of cash bus expects to have in end of each month- takes opening balance and net cash flow into account (net cash flow+opening balance)
the degree to which a business is able to meet its
debts when they fall due.
Benefits of cash flow forecast
1)To identify the timing and significance of any
cash shortages/surpluses—- borrow cash and opportunities eg. new machinery. especially for bus w/seasonal demand =delay payments where cash inflows are low
2)To help secure finance from potential investors or the
bank
3)To give confidence about short term survival-(ENHANCING PLANNING PROCESS) if none more likely mistakes
4)monitoring cash flow to identify problems with cash- where problems have arisen eg. over payment
Limitations of cash flow forecast
1)Based on predicted future inflows and outflows
therefore may be inaccurate
Informed by market research but this may be small
scale, biased or flawed
2)Affected by the external environment which is
outside of the entrepreneur’s control e.g. interest
rates change, a supplier goes out of business, a new
competitor opens
3)Demand may be over (or under) estimated
4) only focuses on cash- profit,profit margins,productivity also important
5)business uses resources when producing- time, employee wage, can spend too much time looking into and avoid other aspects eg. meeting customer needs
budget
a quantitative economic plan prepared and agreed in advance
purpose of budgeting
1) motivation due to responsibility= increased productivity
2)Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured ——e.g.
Are sales targets being achieved?
Are managers keeping expenditure under control?
Is the business operating efficiently to achieve profit targets?
3)EFFICIENCY-important to empower staff by delegating decision making. medium to large businesses budgeting gives financial control to lower levels of management who are best able to make decisions at their point in the business
income budget
expenditure budget
profit budget
historical figures
a target set for the amount of revenue to be achieved in a set time period
a limit placed on the amount to be spent in a given period of time
a target set for the surplus between income and expenditure in a given period of time
quantifiable information bases off past trading records
zero-based budegting
pos vs neg
opportunity cost
a system of budgeting where no money is allocated for costs or spending unless they can be justified by fund holder
1) motivation, reduces waste, flexible
2) time consuming
——————-
when choosing between different alternatives, it is the benefit lost from the next best alternative to the one chosen
variance
variance analysis
adverse variance
favorable v
diff between actual financial outcomes and those budgeted
process of calculating variances and attempting to identify their causes
is one that is bad for the business
- Expenditure higher than budget
- income lower than budget
- Profit lower than budget
one that is good for the business
- Expenditure lower than budget
- Income higher than budget
- Profit higher than budget
causes of variances
Action of competitors
Action of suppliers
Changes in the economy
Internal inefficiency
(Poor management of a budget
Demotivated sales team)
Internal decision making
(Change suppliers,Special promotions)
difficulties of variances
Dependent upon predictions and forecasts
Costs are subject to change
- May be subject to bias and manipulation
Take time and effort which itself has an associated opportunity cost
short term-ism= focus on current budget too much may damage future business performance just to meet current business targets.
- average cost or unit cost
- long run
- short run
- consumer income
- consumer trends
- economic variables
- solvency
- historical data
- cost of producing one unit of output, calculated by dividing total output by total cost
- time period where all factors of production are variable
- time period where at least one factor of production is fixed
- amount of income remaining after taxes and expenses have been deducted from wages
- the habits or behaviors of consumers that determine the goods and services they buy
- Measures within the economy which have effects on business and consumers. Examples include unemployment, inflation and exchange rates
- The degree to which a business is able to meet its debts when they fall due.
- quantitative info based off past trading records
