Theme 2.2: Financial Planning and Managing Finance Part 1 Flashcards
Sales forecast
An estimation of future sales usually based on previous market sales figures or research
Changes needed if a higher sales forecast expected
. 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
Factors that can affect sales forecast
. 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
Down sides of estimation
. 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
Sales
A measure of the amount of goods or service that a business sells over a period of time
Sales volume
The number of a specific product sold in a given time period
Sales revenue
Income generated from sales of a product or service
Total revenue (Sales Revenue)
Total sum of all revenues earned by a business, used because many businesses sell many products and services not just one
Sales Volume Formula
Sales revenue divided by unit price
Sales Revenue Formula
Selling price X Sales Volume
Fixed Costs
Costs that don’t change with differing levels of output
Variable Costs
Costs that do change with differing output
Average Variable Costs Formula
Total variable costs divide output
Average fixed costs
Total fixed cost divide output
Average total costs Formula
Total costs divided by output
Contribution
Difference between the price of a product and its variable costs
Total contribution
Sales revenue minus Total Variable Costs
Break Even Point
Level of output where the total revenue is exactly the same as total costs I.e no profit, nor loss made
Margin of safety
The difference is the difference between the actual level of output and the break even level of output
Strengths of break even analysis
. 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
Limitations of break even analysis
. 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
Budget
Financial plan for future that sets out targets to be met, the cost of achieving them and methods of gaining said finance needed.
Preparing a budget (stages)
. 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
Zero based budget
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
Advantages of zero based budgeting
. 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
Disadvantages of zero based budgeting
. Can be more expensive
. More time consuming
. Managers may not ask for funds because they feel they can’t so opportunities could be missed
Variance
The difference between budgeted figures and actual figures
Adverse Variance
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
Favourable Varaince
Where actual figures are better than that budgeted e.g sales are higher than planned or costs are lower than planned
Problems with budgets
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
