Theme 2.2: Financial Planning and Managing Finance Part 1

Question 1

Sales forecast

Answer 1

An estimation of future sales usually based on previous market sales figures or research

Question 2

Changes needed if a higher sales forecast expected

Answer 2

. Higher budgets especially in the production and distribution areas
. Higher staffing levels to accommodate for the greater production needed.
. Production levels need to be adjusted so they match the forecast
. Stock and purchasing levels adjusted so they can actually make the products.
. Cash flow forecast adjusted to factor in higher costs and more income
. Profit and loss updated to show impact of higher sales forecast

Question 3

Factors that can affect sales forecast

Answer 3

. Consumer: changes in tastes, fashion and trends
. Economic: booms in the economy mean people have more money so buy more, a recession will mean people are more careful so will be more conservative with their money
. Competitors: If a competitor is about to release something big then it’s not likely sales for the other will increase
. Natural events: A wet summer means holidays abroad might rise, sales of ice cream will be low
. Changes in costs: For example if gold prices surge, gold ring sales may fall but platinum rise

Question 4

Down sides of estimation

Answer 4

. Based on past sales and predictions but markets are fickle so can change, pretty much exactly like a weather forecast
. Inaccurate forecasts can cause big problems for a business e.g if a big rise in sales are predicted and you actually get less money if lost as money may have been invested in increasing capacity
. Most factors are completely out of a businesses control

Question 5

Sales

Answer 5

A measure of the amount of goods or service that a business sells over a period of time

Question 6

Sales volume

Answer 6

The number of a specific product sold in a given time period

Question 7

Sales revenue

Answer 7

Income generated from sales of a product or service

Question 8

Total revenue (Sales Revenue)

Answer 8

Total sum of all revenues earned by a business, used because many businesses sell many products and services not just one

Question 9

Sales Volume Formula

Answer 9

Sales revenue divided by unit price

Question 10

Sales Revenue Formula

Answer 10

Selling price X Sales Volume

Question 11

Fixed Costs

Answer 11

Costs that don’t change with differing levels of output

Question 12

Variable Costs

Answer 12

Costs that do change with differing output

Question 13

Average Variable Costs Formula

Answer 13

Total variable costs divide output

Question 14

Average fixed costs

Answer 14

Total fixed cost divide output

Question 15

Average total costs Formula

Answer 15

Total costs divided by output

Question 16

Contribution

Answer 16

Difference between the price of a product and its variable costs

Question 17

Total contribution

Answer 17

Sales revenue minus Total Variable Costs

Question 18

Break Even Point

Answer 18

Level of output where the total revenue is exactly the same as total costs I.e no profit, nor loss made

Question 19

Margin of safety

Answer 19

The difference is the difference between the actual level of output and the break even level of output

Question 20

Strengths of break even analysis

Answer 20

. Gives a business an idea of when they will be making a profit
. Helps to show the impact of changes to costs and revenues on the break even point.
. Helps set out a plan of what they need to achieve in order to gain profit

Question 21

Limitations of break even analysis

Answer 21

. Unpredictable events can occur which makes them unreliable
. Based on assumptions of future events and not facts so not definite predictions will happen.
. Doesn’t factor the changing variable costs from economies of scale
. Assumes sales price stays the same which it may not do due to competition for example

Question 22

Budget

Answer 22

Financial plan for future that sets out targets to be met, the cost of achieving them and methods of gaining said finance needed.

Question 23

Preparing a budget (stages)

Answer 23

. Set objective - managers decide what they want to achieve
. Use data - budget may be based in previous figures or other market information
. Prepare budget - decide on the actual figures to be used, setting revenue targets and cost ceilings (maximum)
. Monitor progress - budgets may have to change in light of unforeseen circumstances
. Review - when budget period over, check to see how well the business either cost centre or department performed

Question 24

Zero based budget

Answer 24

No budget is set and no money is set to allocate costs and all costs and purchases has to be justified which forces them to assess their spending

Question 25

Advantages of zero based budgeting

Answer 25

. More efficient allocation of resources
. Easier to adapt to changing circumstance
. More flexibility in response to change
. Forces managers to think and act with greater care

Question 26

Disadvantages of zero based budgeting

Answer 26

. Can be more expensive
. More time consuming
. Managers may not ask for funds because they feel they can’t so opportunities could be missed

Question 27

Variance

Answer 27

The difference between budgeted figures and actual figures

Question 28

Adverse Variance

Answer 28

Actual figures are worse then budgeted figures which may have a negative impact on a business e.g more is spent on rent than was budgeted

Question 29

Favourable Varaince

Answer 29

Where actual figures are better than that budgeted e.g sales are higher than planned or costs are lower than planned

Question 30

Problems with budgets

Answer 30

Costs rise and fall and there is no real way to predict when this will happen and what impact it will have things like government legislation and the economy can cause a surge or dip in costs in a short period of time