THEME 3 :SECTION 3 (DECISION MAKING ) Flashcards
What is sales forecasting?
-Sales forecasting is when a business predicts future sales volume and revenue using past data and market research
What is quantitative sales forecasting analysis and some methods of it?
Quantitative sales forecasting is how sales forecasting data is gathered. Methods include Time- series analysis, moving averages, scatter graph analysis and correlation
What is time-series analysis?
Time-series analysis is a specific way of analysing a sequence of data points collected over time.
What is cyclical variation and why is it used?
= the difference between actual figures and moving averages.
- Can be useful in creating more accurate sales forecasts
What is extrapolation on graphs and how can it be used to forecast for the future?
Extrapolation is the extension of a graph, curve, or range of values by inferring unknown values from trends in the known data.
DISADVANTAGES of quantitative sales forecasting?
- Data can change very quickly
- Correlation does not show cause and effect
- Extrapolation and moving averages can be harmful is wrong
What is investment appraisal and the names of the main types?
- Investment appraisal is a type of analysis a business can do in order to see the best, easiest and quickest way to receive a return on investment
- Types: Payback period, Average Rate of Return, Net Present Value (sometimes ROCE can be used too )
What is the payback period and what does it show a business?
- Payback period shows a business when they should expect to see their investment come back alone.
The formula for Payback Period
If shown on table = amount to pay back / NCF for payback period x12
If cash flow is consistent = invested amount / annual cash flow
What is the Annual (Average) Rate of Return and what does it show a business?
- ARR is a measure of the proportion the business will get back in terms of what they invested
- shows profitability as a percentage to make it easier to compare to others
The formula for ARR?
ARR= average annual return / investment x100
average annual return = NCF / total years of the project
What is Net Present Value and what does it show a business?
NPV shows the time value of money (how much the money will be worth when it is paid back )
-Considers when the money is received and not just how much is received, but how much that will be worth too
Formula for NPV
sum of present values - cost of initial investment
Then: (net present value /investment)x100
Limitations of using payback period?
- ignores the time value of money
- ignores cash flow after payback (doesn’t take into account that one projects, although It might payback faster it might also not make much future returns)
Limitations of using ARR?
- ignores the time value of money
- ignores the timing of cash flow