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A LEVEL BUSINESS - TH > 2.2 financial planning > Flashcards

2.2 financial planning Flashcards

1
Q

what is a sales forecast?

A

a prediction of future sales volumes and values

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2
Q

what information can businesses use to make a sales forecast?

A

-market research
-backdata (e.g. time series analysis) economic forecasts.

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3
Q

what is a time series analysis?

A

predicting future sales based on past sales figures, taking into account the trend and seasonal fluctuations

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4
Q

why is sales forecasting important?

A

-a vital planning activity
-the sales forecast forms the basis for most other common parts of business planning → HR, production, cash flow
-useful part of competitor analysis

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5
Q

what are the three main methods of sales forecasting?

A

-extrapolation
-correlation
-confidence intervals

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6
Q

what is extrapolation?

A

it uses trends established from historical data to forecast the future

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7
Q

what are moving averages?

A

it takes a data series & smoothes the fluctuations to show an average

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8
Q

benefits of extrapolation

A

-simple method of forecasting
-not much data needed
-quick and cheap

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9
Q

disadvantages of extrapolation

A

-assumes past trend will continue into the future (unlikely)
-ignores qualitative factors (eg: tastes)

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10
Q

define correlation

A

the strength of a relationship between two variables

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11
Q

independent variable

A

the factor that changes and causes the dependent variable to change

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12
Q

dependent variable

A

the variable that is influenced by the dependent variable

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13
Q

positive correlation

A

as the independent variable increases in value, so does the dependent variable

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14
Q

negative correlation

A

as the independent variable increases, the dependent variable falls in value

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15
Q

no correlation

A

no relationship between the independent and dependent variable

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16
Q

what does the line of best fit indicate?

A

the strength of correlation

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17
Q

strong correlation

A

little room between the data points

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18
Q

weak correlation

A

data points are spread quite wide and far away from the line of best fit

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19
Q

what can be done if the data suggests strong correlation

A

the relationship might be used to make marketing predictions

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20
Q

what is a confidence interval?

A

it gives the percentage probability that an estimated range of possible values includes the actual value being estimated

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21
Q

what does a confidence interval help a business do?

A

evaluate the reliability of an estimate, businesses need to know how confident they should be in their estimates & whether or not to act on them

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22
Q

how is a confidence interval used in quality management?

A

percentage reliability of machines & whether they will detect issues

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23
Q

how is a confidence interval used in market research ?

A

to see the reliability of data from customer surveys

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24
Q

3 factors affecting sales forecasts:

A

-consumer trends
-economic variables
-competitor actions

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25
Q

consumer trends

A

fashions may change from season to season, but most consumer behaviours change over a longer period of time (e.g. the trend towards solar-powered energy)

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26
Q

issues with consumer fashions

A

fashions constantly change and can make it very difficult to carry out accurate sales forecasts

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27
Q

what are economic variables?
(+ examples)

A

they influence the level of demand

-economic growth (GDP)
-interest rates
-inflation
-unemployment
-exchange rates

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28
Q

competitor actions

A

-hard to predict, but often reason why sales forecasts prove over-optimistic

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29
Q

when are sales forecasts likely to be inaccurate?

A

-business is a start up (has no previous data)
-fluctuations in economic variables
-product may be a fashion item
-new market entrants
-management have poor sales forecasting ability
-volatile customer tastes/preferences

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30
Q

how does a business generate revenue?

A

by satisfying customer demand

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31
Q

how to calculate revenue

A

selling price x quantity sold

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32
Q

terms for revenue

A

-sales
-income
-turnover
-takings

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33
Q

which two ways can a business increase revenues? (& examples)

A

1) increase quantity sold
↳ cut prices, offer incentives (2 for one), advertise, expand

2) increase selling price
↳ add value

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34
Q

what are costs?

A

amounts that a business incurs in order to make goods and/or provide services

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35
Q

why are costs important?

A

-drain away the profits made by a business
-the difference between making a good and a poor profit margin
-main cause of cash flow problems in business
-change as the output or activity of a business changes

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36
Q

what are variable costs?

A

costs that change as output varies

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37
Q

what are fixed costs?

A

costs which do not change when output varies

38
Q

how do you calculate total costs?

A

fixed costs + variable costs

39
Q

examples of variable costs:

A

-raw materials
-wages based on hours worked

40
Q

examples of fixed costs:

A

-rent
-salaries
-insurance

41
Q

examples of start up costs:

A

-furniture
-equipment
-training

42
Q

semi fixed costs (+examples)

A

fixed in the short term, but change once a certain level of output is reached

eg: rent (business may need to move to bigger place)

43
Q

short run costs

A

refers to the immediate future:
-variable costs are variable and fixed costs are fixed

44
Q

long run costs

A

-all costs are variable
-fixed costs will eventually change over time, some fixed costs may fall, whereas others will rise, such as employee salaries.

45
Q

which costs are easy to estimate & control? (examples)

A

rent, salaries, advertising

46
Q

which costs are hard to estimate & control?

A

-raw materials
-product returns

47
Q

what is average cost/unit cost?

A

the cost per unit of production

48
Q

the larger the output the ______ the unit cost/average cost

A

lower

49
Q

what is profit?

A

the reward or return for taking risks &
making investments

50
Q

why is profit important to a business?

A

-a reward for taking risks
-a key source of finance
-a measure of business success
-a motivating factor

51
Q

how to calculate profit?

A

revenue - total costs

52
Q

when is profit occurring?

A

total sales are more than total costs

53
Q

what is loss?

A

total costs are higher than total sales

54
Q

what is breakeven?

A

the point where total sales equal total costs

55
Q

what is profit in absolute terms?

A

the £ value of profits earned

56
Q

what is profit in relative terms?

A

the profit earned as a/proportion of sales achieved or investment made

57
Q

what does contribution look at?

A

the profit made on individual products

58
Q

how do you calculate contribution & total contribution?

A

selling price - variable cost

total contribution:
contribution per unit x quantity sold

59
Q

what are three methods of calculating breakeven?

A

-a table
-a formula
-a graph

60
Q

what assumptions are made to do a breakeven analysis?

A

-selling price per unit stays the same
-variable cost per unit is the same
-fixed costs don’t vary with output

61
Q

formula for breakeven output

A

fixed costs / contribution per unit

62
Q

steps of drawing a breakeven chart:

A

1) produce two axis, y axis = sales and costs, x axis = output

2) add fixed costs (horizontal line)

3) add variable costs (line that goes upwards linearly)

4) add the total costs (starts from fixed costs line)

5) draw the line for total sales (starts from zero)

6) find the breakeven point (where total sales = total costs)

63
Q

tip for finding the breakeven point

A

go across the fixed costs line (horizontal) to the y axis, then go upwards on the total costs line until there is an intersection

Right Angled Triangle shape

64
Q

what is the margin of safety??

A

the difference between actual output and the breakeven output

65
Q

strengths of breakeven analysis

A

-calculations are quick and easy
-illustrates the importance of keeping fixed costs down to a minimum
-shows a business how to reach profitability
-decide whether a business idea is profitable and viable
-assess the effects of costing and pricing decisions

66
Q

limitations of breakeven analysis

A

-unrealistic assumptions (eg: products are not sold at the same price at different levels of output)
-break-even analysis simplifies a very complex process
-most businesses sell multiple products
-costs are rarely constant, break-even analysis presumes that costs stay the same over various levels of output

67
Q

what is a budget?

A

a financial plan for the future.

68
Q

what should an effective budget do?

A

drive many of the decisions taken across the functional areas of a business

69
Q

who is responsible for controllable costs within budgets?

A

managers

70
Q

uses of budgets in management

A

-turn objectives into practical reality
-provide direction
-allocate resources
-control income and expenditure
-help a business to save towards a goal

71
Q

what is the main purpose of budgets?

A

to ensure efficiency in spending

72
Q

what are the two main approaches to budgeting?

A

1) historical budgeting

2) zero-based budgeting

73
Q

what is historical budgeting?!

A

past figures are used as the basis for the budget

74
Q

evaluation of historical budgeting:

A

strengths:
-realistic in that it is based on actual results

weaknesses:
-circumstances may have changed

75
Q

what is zero based budgeting?

A

budget is based on new proposals for sales and costs (built from the bottom-up)

76
Q

evaluation of zero based budgeting:

A

strengths:
-more realistic
-suitable for a new business

weaknesses:
-more complicated & time consuming

77
Q

what are the three main types of budget?

A

1) revenue - expected income
2) expenditure - expected costs
3) profit budget - combined sales and cost budgets

78
Q

what are two key sources of information for budgets?

A

-financial performance in previous periods
-market research → competitor activity, trends in market size

79
Q

problems with budgets:

A

-a budget is only as accurate as the data on which it is based
-past trends can be a poor indicator of what is likely to happen in the future
-decisions taken by governments can affect budgets
-sales forecasting can be inaccurate and affect budgeting
-unexpected costs always happen

80
Q

what is a variance analysis?

A

calculating and investigating the differences between actual results and the budget

81
Q

when does a variance arise?

A

when there is a difference between actual and budget figures

82
Q

what two things can variances be?

A

1) positive/favourable (better than expected)

2) adverse/unfavourable (worse than expected)

83
Q

examples of favourable variance

A

-costs lower than expected
-revenue/profits higher than expected

84
Q

examples of adverse variance

A

-costs higher than expected
-revenue/profits lower than expected

85
Q

possible causes of favourable variances

A

-stronger market demand than expected
-selling prices increased higher than budget
-cautious sales and cost assumptions (e.g. cost contingencies) → emergency
-competitor weakness

86
Q

possible causes of adverse variances

A

-unexpected events lead to unbudgeted costs
-over-spends
-market conditions mean selling prices are lower than budget

87
Q

do variances matter?

A

it depends on…

-if the variance was foreseen
-the size of the variance
-the cause of the variance
-whether the variance was temporary or long term

88
Q

what should management do with a variance?

A

-act only if the variance is outside an agreed margin
-investigate the cause of variance &
whether it was avoidable or unavoidable
-fix the problem

89
Q

what to remember about adverse variance (+example)

A

it might result from something that is good that has happened in the business

eg: higher production costs than budget (adverse variance) that occur because sales are significantly higher than budget (favourable budget)

90
Q

4 behavioural implications of budgets:

A

-budgets are de-motivating if they are imposed rather than negotiated
-setting unrealistic targets adds to de-motivation
-budgets can contribute to departmental rivalry - battles over budget allocation
-it can result in a “use it or lose it” mentality - spend up to the budget to preserve it for next year

A LEVEL BUSINESS - TH (5 decks)

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