2.2- Finance Planning

Question 1

What is a sales forecast?

Answer 1

A sales forecast estimates the volume of value of future sales using market research or past sales data.

Question 2

What are the purposes of sales forecasting? (5 points)

Answer 2

• Avoid cash flow problems
• Frees up management time
• Production capacity
• Employ more workers
• Start promotional activity

Question 3

What are the 3 factors that affect sales forecasting?

Answer 3

• Consumer trends
• Economic variables
• Action of competitors

Question 4

What is sales volume?

Answer 4

How many goods have been sold.

Question 5

What is sales revenue?

Answer 5

How much money has been made.

Question 6

What is the equations to work out sales volume?

Answer 6

Sales volume= Sales revenue/selling price

Question 7

What are fixed costs?

Answer 7

Costs that do not vary with the level of output.

Question 8

What is a budget?

Answer 8

A budget is an estimate of income or expenditure for a set period of time.

Question 9

What are the 4 purposes of budgets?

Answer 9

1. Planning
2. Forecasting
3. Communication
4. Motivation

Question 10

How does a budget promote planning within a business?

Answer 10

A business can use a budget to help them plan for any expenses in the year (e.g tax).

Question 11

How does a budget promote forecasting within a business?

Answer 11

Sales or revenue forecasts are typically based on a combination of the business sales history and how effective they expect their future trading to be.

Question 12

How does budgets promote communication within a business?

Answer 12

Setting a budget in a small or large business is an ideal opportunity for the owners to communicate their objectives of the business in a financial plan.

Question 13

How does budgets promote motivation within a business?

Answer 13

Budgets can be used to motivate staff to be more careful with the finance.

Question 14

What are historical budgets?

Answer 14

• Budgets set for a business using current financial figures and based on historical performance of the business.
• Previous years income and expenditure are used as a base on which to build the budget figures for the next year.

Question 15

What is a zero based budget?

Answer 15

• Budget set for a business by using figures based on potential performance.
• This method takes away all historical assumptions and starts with a clean slate.
• May be used by a start up with no historical data.

Question 16

What is variance analysis?

Answer 16

• Analyse the budget figures against what actually happens, there might be a variance.
• Favourable variance, the manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit.
• Adverse variance, the manager has overspent and it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year.

Question 17

What are the difficulties of budgeting?

Answer 17

• Tendency for managers to spend up to the limit.
• Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic.

Question 18

What are the limitations of budgeting?

Answer 18

• Budgets can cause inter department rivalry as some departments get more money than others.
• Can make managers short term and short sighted, they become budget driven rather than consumer driven.

Question 19

What is break even?

Answer 19

Break even is the point at which total revenue equals total costs, so the business is making neither profit nor a loss, TR=TC.

Question 20

What is revenue?

Answer 20

The amount that you receive from sales.

Question 21

What is profit?

Answer 21

Profit is revenue minus costs.

Question 22

What is contribution?

Answer 22

Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business. (Profit without minusing the fixed costs).

Question 23

What is the equation for contribution?

Answer 23

Selling price- variable costs per item

Question 24

What is the equation for break even?

Answer 24

Break even= FC/SP-VC per unit

Question 25

What is the equation to find the margin of safety?

Answer 25

Margin of safety= Actual sales- Break even level of sales.