Theme 2 - Financial planning

Question 2

What are cash-flow forecasts?

Answer 2

Cash flow forecasts show cash inflows and cash outflows and they show the amount of money that managers expect to flow into the business and flow out of the business over a period of time

Question 3

What are cash inflows?

Answer 3

Cash-inflows are sums of money received by a business
e.g. from product sales or loans

Question 4

What are cash- outflows?

Answer 4

Cash outflows are sums of money paid out by a business
e.g. to buy raw materials or pay wages

Question 5

What is working capital?

Answer 5

Working capital is the amount of cash that a business has available for day-day spending

Businesses need to pay out money for costs of producing an order before they get paid for the order so they need to make sure they always have enough working capital available

Question 6

What are debtors?

Answer 6

Debtors are people who owe the business money and the owed money is known as receivable

This happens when a customer buys a product they might not get the money straight away ( customer may get the product on credit)

Question 7

What are creditors?

Answer 7

Creditors are people who are owed money by the business and the money is known as payable

This occurs if business buys goods using Trade-credit and doesnt pay the supplier straight away

Question 8

What are the uses of cash-flow forecasts?

Answer 8

• used by managers to make sure they always have enough cash to pay suppliers and employees
• can predict when the business will be short of cash and organise a loan or overdraft
• Businesses include forecasts in their business plans as sources of finance will want to see the forecasts when deciding to give the business a loan
• cash flow forecasts prove that businesses have done their research and have an idea of where theyll be in the future
• can check firm isnt holding too much cash

Question 9

What are the implications of cash flow forecasts?

Answer 9

• Good cash flow forecasting needs lots of experience and research into the market so it is time consuming
• Businesses exist in dynamic markets where circumstances can change suddenly and frequently
• Competitors can enter or leave the market
• Businesses may need to make changes to some activities due to these changes in cash flow
• An inaccurate cash flow can be disastorous as businesses that run out of cash will become insolvent and have to close down the business

Question 10

What is sales forecasting?

Answer 10

Sales forecasting is predicting future sales volume and sales revenue based ob the past sales data and market research

Question 11

How does sales forecasting help businesses make decisions about finance?

Answer 11

-Sales revenue is usually a firms main source of cash inflows so sales forecast is important to be able to generate accurate cash flow forecasts
- Helps a firm to know when it might need more finance to prevent running out of cash

Question 12

How does sales forecasting help businesses to make decisions about marketing?

Answer 12

• Firms use different marketing methods to drive sales
• Sales forecast and actions of the marketing department are closely linked

Question 13

How does sales forecasting help businesses to make decisions about resources?

Answer 13

-How much of a product a firm sells affects how many resources it needs
- More of the product sold= more resources needed
- Sales forecast helps to make sure the firm has all the resources it needs so it can meet the predicted demand but doesnt waste money on resources it needs when sales are expected to be low

Question 14

What are the factors affectibg sales forecast?

Answer 14

Consumer trends: sometimes these are predictable ( more people buy fairy lights at christmas) but sometimes they are more uncertain ( scientific research in 2010s showing butter isnt bad for health)
Economic variables: changes in economic variakes affects how much disposable income and therefore how many products they buy how much it changes depend son the nature of the firm and the products it sells
Actions of competitors: if a competitor decreases their prices or launches a new product a firms predicted sales may decrease

Question 15

What are the difficulties of sales forecasting?

Answer 15

• A accurate sales forecast are very hard to make and especially in dynamic markets when external factors are constantly changing
• Difficult to know in advance how the factors are gonna change
  -Difficult know the knock on effects
• difficult to make accurate sales forcast

Question 16

What is break even analysis?

Answer 16

Break even analysis is a method of determining the level of sales at which an will either make profit or a loss

Question 17

What is the break even point?

Answer 17

The break even point is the level of sales a business needs to cover its costs

Question 18

When do businesses make a profit?

Answer 18

Businesses make a profit when sales are above the break even point as revenue exceeds costs

Question 19

When do businesses make a loss?

Answer 19

A business makes a loss when sales are below the break even point as costs are more than revenue

Question 20

Why is break eve anaylis important?

Answer 20

• New businesses should always do a BEA to find the BEp as it tells the business how much they need to sell to break even
• Anyone thinking to loan money to a business may want to see BEA as a part of their business plan as it helps them to decided whether to lend the money
• Established businesses use break even when preparing to launch new products to work out how much profit theyre likley to make and predict the impact it will have on their cash flow

Question 21

Whats contribution per unit?

Answer 21

Contribution per unit is the difference between the selling price of a product and the variable cost it takes to produce the product

Question 22

Whats the calculation of contribution per unit?

Answer 22

Contribution per unit= selling price - variable costs per unit

Question 23

What is total contribuion?

Answer 23

Total contribuion is used to pay fixed costs and the amount left over is profit

Question 24

What is break even point calcuation?

Answer 24

Break even point = total fixed costs / contribution per unit

Question 25

What is a break even chart?

Answer 25

Break even chart shows the costs and revenue plotted against the revenue

Question 26

What is the margain of saftey?

Answer 26

The margain of saftey is the amount sales can fall before the break even point is reached and the business makes no profit

Question 27

What is the margain of saftey calcuatoon?

Answer 27

Margain of saftey = actual output - break even point

Question 28

What are the benefits and drawbacks of break even anaylis?

Answer 28

benefits : - Its easy to do if you can plot figures on a graph accurately you can do break even analysis - Its quick managers can see the break even output and margin of saftey immediately so they can take quick actions to cit costs or increase sales if they need to increase MOS - BEA lets businesses forecast how variations in sales will affect costs revenue and profit and how the variations in price and costs will affect how much they need to sell - Businesses can use break even anaylis to help persuade sources of finance to give them money - Break even analysis influences decisons on whether new products are launched or not Drawbacks: - BEA assumes that VC always rise steadily this isnt always the case - BEA is simpel for a single product but most businesses sell lots of products so it becomes complicated - If data is inaccurate results will be wrong - BEA assumes the business sells products without any waste - BEA only tells you have much you need to sell not how much you're going to sell

Question 29

What is a budget?

Answer 29

A budget is a financial plan for the future * it forecasts future earnings and future sprending usually over a 12 month period

Question 30

What is an income budget?

Answer 30

Income budgets forecasts the amount of money that will come into the business as revenue - The business needs to predict how much it will sell and at what prices - Managers estimate this using sales figures from previous years as well as market research - To set income budget businesses research and predict how sales are going to go up and down through the year

Question 31

What is an expenditure budget?

Answer 31

Expenditure budget = predict what the businesses total costs will be for the year and taking into account both fixed and variable costs - variable costs increase with output so managers must predict output based on sales estimates - EB is often broken down into department EB each department is allocated a certain amount of money to spend

Question 32

What is a profit budget?

Answer 32

Profit budget = uses the income budget minus the expenditure budget to calcuate expoecrted profit or loss will be fir the year

Question 33

What are budget holders?

Answer 33

Budget holders = people who are responsible for spending each budget - despartment expenditure budgets are broken down into budgets for specific activities within the department

Question 34

What are the pros and cons of budgeting?

Answer 34

Benefits: - Targets could motivate workers as it gives them something to work towards - Help to control income and expenditure - Help managers to review activities and decsions - Departments can coordainate spending - Help persuade invertsors that the busienss will be succesfull Drawbacks: - Can cause resentment and rivarly if departments compete - Restrictive - not chaning to makret conditons (pestle) - Time consuomh (opportunity cost) - Inflation is difficult to precit ( economy) - Start up businesses may striggel to get data from other firms so may be inaccurate - Use it or lose it mentality

Question 35

What is zero based budgeting?

Answer 35

Zero based budgeting = when start up businesses have to develop their budgets from scratch - BHS start with a £0 budget and have to get approval to spend money on activities - Figures used in budget are based on potential performance so they need to plan all years activities and ask for money on them and be prepared to justify their request to finance director -takes longer than historical - If done properly more accurate than historical

Question 36

What is historical budgeting?

Answer 36

Historical budget = the budgets are updated each year based on percenyahe increase or decrease from last years budget - can be quicker but assumes codntions are unchangebale

Question 37

What is a fixed budget?

Answer 37

Fixed budgeting means budget holders jave to stick to their budget plams thrpughput the year even if conditions change - this can prevent a firm reacting to new opportunities and threats that they didnt know about when they set the budget - Provide discpline and certainity which helps to control cash flow

Question 38

What is a flexible budget?

Answer 38

Flexible budget allows budgets to be altered in response to significant changes in the market or economy

Question 39

What is variance ?

Answer 39

Variance = the difference between actual figures and budgeted figures - a variance means the business is performing worse or better than expected

Question 40

What is a favourable variance?

Answer 40

A favourable variance = occurs when a firm is performing better than expected - it can be called a positive variance - if revenue or profit is more than the budget says - if costs are below cost predictions

Question 41

What is adverse variance ?

Answer 41

Adverse variance = occurs when a form is performing worse than expected- it can be called a negative variance - selling fewer items than income budget predicted - spending more on marketing than expected

Question 42

What is the variance calculation?

Answer 42

Variance = actual figure - budgeted figure

Question 43

What is cumulative variance ?

Answer 43

Cumulative variance = all the variances added up and combined as one

Question 44

What internal factors cause variances ?

Answer 44

Internal : - improving efficiency causes favourable variances - a firm may over estimate the amount of money it can save by streamlining the production methods - a firm might under estimate the cost of making a change to its organisation - changing selling price changes revenue which creates a variance Internal causes of a variance are a big concern as it suggests internal communication needs improving

Question 45

What are small variances ?

Answer 45

Small variances aren’t a problem as they can help to motivate workers - staff try to catch up and sort out small variances themselves

Question 46

What are large variances ?

Answer 46

Large variances can demotivate staff as staff don’t work hard if they have a large favourable variance as they don’t see the need and large adverse variances may seem impossible to overcome

Question 47

What are decisions based on adverse variances?

Answer 47

- They can change the marketing mix. Cutting prices will increase sales but only if demand is price elastic. Updating the product might make it look more attractive to customers. Businesses can also look for a new market for the producy , or change the promotional stratergy - Streamlining production makes the business more efficient, so this reduces costs - Try to motivate employees to work harder - Businesses can try cut costs by asking their suppliers for a better deal - Businesses may need to do additional market research to improve forecasts in the future

Question 48

What are decisions based on favourable variances?

Answer 48

- If a favourable variance is caused by a pessimistic budget, they can set more ambitious tagrets next time - If the variance is because of increase productivity in one part of the business they can try to get everyone doing wahtever was responsible fir the improvment and set higher targets in the next budget - A favourable variance could indicate more sales than predicted so a business may need to increase the production of a product or take on additional staff to meet demand.