THEME 2: SECTION 2 (FINANCIAL PLANNING)

Question 1

what is sales forecasting and how does it differ from cash flow forecasting?

Answer 1

• Sales forecasting = predicting future sales revenue and volume based on past data and market research.
• cash flow forecasting = estimating how much money will come into and out of the business
• Sales forecasts can help generate accurate cash flow forecasts as it predicts sales revenue (cash inflows)

Question 2

What can Sales forecasting help to make decisions on?

Answer 2

• Finance = it helps to create accurate cash flow forecasts which are used to predict when more finance is needed
• Marketing = closely linked to the marketing department as marketing drives sales. So predicting decreases can create marketing plans.
• Resources = the more a business sells the more resources will be needed, can ensure they meet demand without holding cash up in stock

Question 3

What factors affect sales forecasting?

Answer 3

• level of competition
• economic changes
• Actions of competitors

Question 4

What is the formula for sales volume?

Answer 4

Sales volume = sales revenue / selling price

Question 5

What is the formula for sales revenue?

Answer 5

Sales revenue = sales volume x selling price

Question 6

What is the formula for fixed costs?

Answer 6

Fixed costs = total costs - variable costs

Question 7

What is the formula for total costs?

Answer 7

Total costs = fixed costs + variable costs

Question 8

What is the formula for total variable costs?

Answer 8

Total variable costs = average variable costs x quantity produced

Question 9

What is the formula for average variable costs?

Answer 9

Average Variable costs (AVC) = sum of variable costs / output

Question 10

Define the term contribution per unit

Answer 10

Every time a sale is made you can calculate how much of that sale will Contribute to us breaking even

Question 11

Define total contribution

Answer 11

The total contribution is the contribution from all units sold and is used to pay fixed costs

Question 12

What is the formula for contribution per unit?

Answer 12

Contribution per unit = selling price – variable costs per unit

Question 13

What is the formula for total contribution?

Answer 13

Total contribution = contribution per unit x number of units sold

Question 14

What is the Break-Even point formula?

Answer 14

Break- even = total fixed costs / contribution per unit

Question 15

Define the term margin of safety and show the formula

Answer 15

The amount that sales can fall before the break-even point (BEP) is reached and the business makes no profit.
-Margin of safety = actual output – break-even point

Question 16

What is the purpose of a budget and what are the three types a business can have?

Answer 16

A financial plan for the future.

• Expenditure budget: deals with costs
• Revenue budgets: deals with predicted revenue
• Profit budgets: expenditure - revenue budget figure

Question 17

What is variance analysis?

Answer 17

The study of deviations of actual behaviour versus forecasted or planned behaviour in budgeting or management accounting.

Question 18

What does it mean when a variance is adverse or favourable?

Answer 18

Adverse variance = when a firm is performing worse than they predicted
Favourable = a firm performing better than they predicted

Question 19

Pros and Cons of sales forecasting

Answer 19

Pros 
-helps to make strategic decisions 
-Numerical so easy to interpret and easy to analyse for example graphs can be made.
- starting point of a business plan
Cons
- hard to make accurate 
- based on past data

Question 20

What is a budget?

Answer 20

A budget forecasts future earnings and spendings

Question 21

Pros of budgeting

Answer 21

• can be motivating, give targets to work toward.
• help control income and expenditure
• review and make decisions
• a communication tool to share information
• used in business plan

Question 22

What are the three types of budgets

Answer 22

• expenditure
• income
• profit