Theme 2: Section 7 Financial Planning Flashcards
Sales Forecasting
Predicting future sales/volume.
Sales Revenue and formula
Past sales data, Market Research.
Selling Price x Sales Volume.
Sales Volume and Formula
Number of units sold in a time period.
Sales Revenue/Selling Price.
Fixed Costs
Don’t change without output, rent.
Variable Costs
Rise/Fall as output changes, wages, raw materials.
Total Variable Costs Formula
Average Variable Cost x Quantity Produced
Total Costs Formula
Fixed Costs + Variable Costs
Profit and Formula
Deduct Total Costs from Total Revenue.
Total Revenue - Total Costs.
Break-Even point (Output) and Formula
Level of Sales a business needs to cover Total Costs.
Total Fixed Costs + Total Variable Costs= Total Revenue.
Contribution Per Unit and Formula
Difference between Selling Price and Variable Cost.
Selling Price - Variable Cost Per Unit.
Total Contribution (Contribution from units sold).
Used for Fixed Costs.
Break-Even Point and Formula
Total Contribution=Fixed Costs.
Total Fixed Costs/ Contribution Per Unit.
Margin of Safety Formula
Actual Output - Beak-Even Output
Break-Even Analysis Advantages
Easy to do if accurate plots, easier to persuade for source of finance.
Break-Even Analysis Disadvantages
Inaccurate data has wrong results, it tells how many units for Break-Even not how many going to actually sell.
Budget
Forecast future earnings/Spending over 12 month period.
Income Budgets
Forecast many coming into business as Revenue.
Predict how much sell, what price using previous sale figures/Market Research.
Expenditure Budgets
Predict Total Costs for the year.
Variable Costs increase with output, predict output on sale estimate.
Profit Budgets
Income budget minus expenditure budget to calculate profit or loss for the year.
Budgeting Benefits
Motivating, employee targets.
Helps controls Income, expenditure.
Helps focus on priorities.
Budgeting Drawbacks
Prices can change, inflation.
Struggle get data, inaccurate budget.
Historical Budgets, updated each year
Based on percentage increase/decrease from last year.
Quick, sample but assumes conditions are the same.
Zero-based budgeting, starting from scratch each year
Based on potential performance start £0, plan all year activity for source of finance.
More accurate than historical if done correctly.
Fixed Budgeting
Stick to plans all year, prevents reacting to new threats.
Provides certainty, liquidity problems-controls cash flow
Flexible Budgeting
Allows budgets to be altered to changes in market/economy.
Zero-Based Budgeting
More flexibility than historical budgeting.
Variance and Formula
Business performing worse or better than expected.
Actual Figure - Budgeted Figure
Favourable Variance (Performing better)
Revenue or Profit is more than the budget say it’s going to be, costs below cost predictions.
Adverse Variance (Performing worse)
Selling fewer items than income budget predicts, spending more on an advert.
Cumulative Variance
Actual sales exceed budgeted sales (3,000) and expenditure on raw materials below budget (2,000) combined favourable variance (5,000). (3,000+(2,000)=(5,0000)
Variance External Factors
Competitor behaviour, trends change increase/reduce demand.
Economy, workers wage.
Raw Materials Increase.
Variance Internal Factors
Changing selling price changes revenue.
Improving efficiency.
Underestimate cost of change.
Variance Analysis
Spotting variances, figuring out why they’ve happened then fix them.
Small Variances
Motivate workers, catch up and fix it themselves.
Large Variances
Demotivate workers, feel the tasks impossible, already failed.
Businesses changing Variances
Not changing the budget too much.
Removes Certainty, removes benefits.
Workers less motivated, won’t try anymore.
Decisions based on Favourable Variances
Set more ambitious targets next time.
Increased productivity, additional staff to meet demand.
Decisions based on Adverse Variances
Cut costs, ask suppliers for better deals.
Additional Market Research, improve forecasts.
Updating product, attractive to customers.
