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Buisness > 2.2 Financial Planning > Flashcards

2.2 Financial Planning Flashcards

1
Q

Formula for sales revenue

A

sales volume x selling price

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2
Q

What are fixed costs

A
  • costs that do not change as output changes
  • linked to time (e.g. rent) rather than how busy the business is
  • price always stays same- even when business isnt producing/ when business is producing loads
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3
Q

How does a rise in sales affect fixed costs

A

a rise in sales spreads fixed cost over more units- meaning fixed cost per unit is lower

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4
Q

Give examples of fixed costs

A
  • rent
  • heating
  • lighting
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5
Q

What are variable costs

A
  • costs that change depending on output

- e.g. if manufacturer doubles amount produced- material costs would double

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6
Q

Give 3 examples of variable costs

A
  • raw materials
  • fuel costs
  • packaging
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7
Q

What are total costs

A

-adding together fixed and variable costs

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8
Q

Formula for total variable costs

A

variable cost per unit x number of units produced (output)

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9
Q

What is sales forecasting

A

Sales forecasting is the process of estimating future revenue by predicting the amount of product or services will be sold

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10
Q

Name 4 purposes of sales forecasting

A
  • HR plan- ensures staff with right skills are employed and correct number of staff are at work
  • marketing budgets- business
  • profit forecasts and budgets- when planning how much firm is expecting to make in rev profit- basis will be accurate sales forecasts- help shape expectations of spending
  • production planning- to satisfy demand for product businesses need to ensure enough materials are brought and enough products are made- work back from sales forecasts
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11
Q

Name 4 factors affecting sales forecasts

A

consumer trends -> demand in markets change as consumer tastes & fashions change -> affects market demand, share

economic variables -> demand is sensitive to changes in; interest rates, exchange rates

actions of competitors ->

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12
Q

What is a trend

A

general path that a variable takes over a period of time

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13
Q

How do consumer trends affect sales forecasting

A

-tastes and habits change as time passes so effective sales forecasting must allow for changing of this

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14
Q

Give examples of possible consumer trends

A
  • demographics- ageing pop- increased demand for products aimed at elderly
  • globalisation- increased willingness to buy products which recognises global nature of todays world
  • affluence- consumers have befome wealthier- more able/ willing to spend on luxuries
  • economic variables- brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products
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15
Q

How do economic variabkes affect sales forecasts

A

brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products

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16
Q

How does changes in individual economic variavles effect sales

-name 3 ways

A
  • value of pound- decrease in value of pound makes imports more expensive- push buyers to buy UK-produced products
  • changes in taxation-taxes on individual items can affect demand, as well as general taxation (VAT)
  • inflation- higher than rate of increase of average incomes- consumers would need to spend less- decrease in sales
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17
Q

Name 3 ways actions of competitiors can affect sales

A
  • changing price- competitor that undercuts ur price- likely to steal sales- making sales forecast optismic
  • launching new products- launch of new prodyct or new competitor can have negafive effect on forecasted sales
  • promotional campaigns- competitors running succesfdul campaigns- steal market share- make sales forecasts look optimistic
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18
Q

Name a difficulty of sales forecasting

A

-extrapolation- sales forecasting assumes past trends will continue

-

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19
Q

Name the 3 methods of sales forecasting

A

extrapolation

correlation

confidence intervals

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20
Q

What is extrapolation

A

-uses trends established from historical data to forecast future

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21
Q

What is correlation

A

looks at strength of relationship between 2 variables

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22
Q

What are confidence intervals

A

gives % probability that estimated range of possible values includes the actual value estimated

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23
Q

Name 3 circumstances where sales forecasts are likely to be inaccurate

A

new business

product is a fashion item

demand is hughly sensitive to changes in price and income (elasticity)

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24
Q

how do you work out % change

A

new - old/ old x100

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25
Q

What are the 3 types of correlation

A
  • positive correlation- relationship where independent variable increases so does dependent v
  • negative correlation- negative relationship exists where independent v increases and dependent v decreases in value
  • no correlation- no discernible relationship between independent and dependent
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26
Q

What is breakeven

A

where a business is selling just enough to cover its costs without making a profit

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27
Q

To calculate breakeven what does a business need to know

A
  • seling price
  • variable costs per unit
  • fixed costs
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28
Q

Give the formula for breakeven

A

fixed costs/ (selling price - variable costs per unit)

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29
Q

What should the fixed cost line always be on a graph and why

A
  • fixed cost line should always be flat

- as costs are at the same level of output

30
Q

Where should the total cost line always be on the graph and why

A
  • starts on left at the fixed cost line

- as it shows the effect of adding fixed costs and variable costs

31
Q

Where should the total revenue line always be on the graph and why

A
  • starts at point (0,0)

- as no revenue is generated if nothing is sold

32
Q

Where is the breakeven output line on the graph and what does it tell you

A
  • identified by dropping a vertical line from the point where TR and TC cross
  • tells you the amount of output needed to be sold to cover costs
33
Q

definition of overhead costs

A

costs incurred by business as a whole

34
Q

definition of budgets

A

target for revenue/ costs for future time period

35
Q

Name the 2 things budgets are set for

A
  • income

- expenditure

36
Q

What is income budget

A

sets target for value of sales to be achieved

37
Q

What is expenditure budget

A

gives budget-holders a limit under which they must keep their departments costs

38
Q

Name 3 purposes of budgets

A
  • focus on expenditure on companys main objectives for a time period
  • expenditure budgets -> ensure department doesn’t spend more than company expects
  • motivate staff to try and hit certain targets
39
Q

Name the 2 types of budget

A
  • historical budget

- zero-based budget

40
Q

What is a historical budget

A

budget set using last years budget as a guide

-adjustments would be made for forseeable changes

41
Q

What is a zero-based budget

A

setting budget to zero each year expecting budget holder to justify need for every pound they ask for

42
Q

What is variance analysis

A

looking back to calculate difference between budgeted figure and actual figure that occurred

43
Q

Name the 2 types of variances

A
  • adverse

- favourable

44
Q

What is adverse variances

A

when actual figure was worse than budgeted figure

45
Q

What are favourable variances

A

when actual figure was better for business than the budgeted figure

46
Q

What effect would it have on profit if the actual was lower than the budget in terms of income

-what variance would this be as a result

A

profit would be lower than expected

-adverse

47
Q

What effect would it have on profit if the actual was higher than the budget in terms of income

-what variance would this be as a result

A

profit would be higher than expected

-favourable

48
Q

What effect would it have on profit if the actual was lower than the budget in terms of expenditure

-what variance would this be as a result

A

profit would be higher than expected

-favourable

49
Q

What effect would it have on profit if the actual was higher than the budget in terms of expenditure

-what variance would this be as a result

A

profit would be lower than expected

-adverse

50
Q

Name 3 reasons as to why budget variances occur

A
  • original budget was unrealistic
  • target was not met due to factors beyond budget holders control
  • target was not met due to factors within budget holders control
51
Q

Name 4 difficulties with budgeting

A
  • setting budgets
  • agreeing budgets
  • failing to understand causes of budget variance
  • costs of system outweight benefits
52
Q

Why can setting budgets be hard

A

hard to ensure targets are set realistically

53
Q

Why can agreeing budgets be hard

A

less motivating and effective than giving budet-holders a genuine say in setting their own targets

54
Q

Why can failing to understand causes of budget variance be hard

A

blaming budget-holder for failing to meet impossible target- demotivating

55
Q

Why can the costs of system outweigh benefits be hard

A

less need for financial control to be delegated- single boss may be able to keep eye on all finances

56
Q

What is contribution

A

amount of money left after deducting VC from sell price

-contributed towards fixed costs and then profit

57
Q

Give the formula for contirbution

A

total sales - total varaible price

58
Q

Give the formula for contirbution per unit

A

(selling price - variable cost) per unit

59
Q

Total contribution formula

A

contribution per unit x number of units sold

60
Q

How can you calculate profit using contribution

A

( total revenue - total unit cost ) - fixed costs

61
Q

When is the breakeven point

A

when total sales = total costs

62
Q

What is the margin of safety

A

difference between actual output and the breakeven point

63
Q

What are some advantages of breakeven?

A
  • focuses on what output is required to reach profitability
  • helps management + finance providers better understand risk of business
  • shows importance of keeping fixed costs to a minimum
  • calculations are quick and easy
64
Q

What are limitations to breakeven?

A
  • unrealistic assumptions (products not sold at same price at differant levels of output
  • sales are unlikely to be same as output ( build up of stock)
  • variable costs dont always stay the same
  • most businesses sell more then one product
  • planning aid rather then decision making tool
65
Q

What is profit budget

A

difference between sales revenue budgets and expenditure budgets

66
Q

What is a limitation of budgeting revenue too low

A

budget: 700
actual: 800

  • if budgeting was more accurate- business would be able to forsee £800 revenue- so actual figure couldve been higher
  • as budget of 800- motivate workers beyond that figure- so business couldve produced an actual of 850
67
Q

What is a moving average

A

-it takes a data series and smoothes out fluctuations to show an average

-aim is to take out the extreme of data

68
Q

What is strong correlation

A

line of best fit indicates strength of correlation

-strong c -> little room between data points and the line

69
Q

What is weak correlation

A

data points are spread far from line of best fit

70
Q

What is a confidence interval

A

gives % probability that an estimated range of possible values in fact includes the actual value being estimated​

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