2.2 Financial Planning

Question 1

What do sales forecasts do?

Answer 1

Predict future revenues based on past sales figures

Question 2

What will sales forecasts will usually focus on what happens in the future to what?

Answer 2

• The volume and value of sales
• The size of the market
• Sales as a result of promotional activity

Question 3

What consumer trends can affect sales forecasts?

Answer 3

Seasonal variations- demand for certain goods is essential e.g. major religous festivals, holiday periods & annual events- impact demand for wide range of products

Fashion- Often led by celebs & their influence can have a relitavely short impact on sales

Long term trends- Consumer behaviour, attitudes and spending habits can have a relitavely short-term impact on sales

Question 4

What economic variables can affect sales forecast?

Answer 4

Economic growth- During periods of economic growth increased consumer incomes will lead to higher than forecast sales

Inflation- The general increase in prices overtime reduces consumers’ spending power

Unemployment- Increased levels of unemployment are often experienced during periods of recession & tend to be a key cause of reduced spending in economy

Question 5

What difficulties are there of sales forecasting?

Answer 5

• The future does not always mirror the past- Fads &fashion/ tastes change/economic factors/competitor actions/ the unexpected
• Too much data- Media coverage/Past sales data/governnment data
• Interpretation- experience bias/specialist opinion/ budget and time constraints

Question 6

What is sales volume?

Answer 6

The number of units sold by a business

Question 7

What is sales revenue?

Answer 7

The value of the units sold by a business

e.g. the revenue earned by apple music from sales of music downloads

Question 8

What is the formula for sales revenue?

Answer 8

Sales revenue= Selling price x number of units sold

Question 9

What is the correlation between sales revenue and sales volume?

Answer 9

Sales revenue usually increases as the sales volume increases

Question 10

What are fixed costs?

Answer 10

Costs that do not change as the level of output changes
(these have to be paid whether the output is 0 or 5000)

e.g. building rent, salaries, insurance, bankloan repayments

Question 11

What are variable costs?

Answer 11

Costs that vary directly with the output
(these increase as output increases & vice versa)

e.g. raw materials

Question 12

What are total costs?

Answer 12

The sum of the fixed + total variable costs

Question 13

What is the formula for total costs?

Answer 13

Total costs= total fixed costs + total variable costs

Question 14

What is the formula for total variable costs?

Answer 14

Total variable cost= Variable cost x Quantity

Question 15

What is the formula for average total cost?

Answer 15

Total cost / quantity

Question 16

What is the formula for variable cost per unit?

Answer 16

Total variable costs / quantity

Question 17

What is ‘contribution’?

Answer 17

Refers to a products selling price minus the variable costs directly involved in producing that unit

Question 18

What is the formula for contribution?

Answer 18

Contribution= Selling price per unit - variable cost per unit

(use this formula to help calculate BEP)

It is called contribution as this amount contributes towards paying off the fixed costs of the business

Question 19

What is the break-even point?

Answer 19

Where total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit or a loss

Question 20

What is the formula for break even point?

Answer 20

BEP= Fixed costs / (Selling price per unit- Variable cost per unit)

Question 21

What is the margin of safety?

Answer 21

The difference between the actual level of output of a business and its break even level of output

Question 22

How do you calculate the margin of safety?

Answer 22

MoS= Actual level of output - breakeven level of output

Question 23

What are the limitations of break-even analysis?

Answer 23

• BE analysis assumes that all output is sold
• Break Even charts cannot be easily amended when conditions (e.g. costs and selling price) change
• Less useful for businesses who produce more than one prodcut

Question 24

Define the term ‘budget’

Answer 24

A financial plan that a business (or department in a business) sets about costs and revenue

Question 25

What are the reasons for business using budgets?

Answer 25

Planning & monitoring- businesses that use budgets are actively planning ahead - problems & their solutions may be considered & solved in advance

Control- Frequent monotoring of budgets allows managers to precisely control their functional area

Motivation & efficiency- Budgets play an important role in target-setting & performance management which can be used by managers to measure successs

Question 26

What types of budgets are there?

Answer 26

• Historical figure budgets
• Zero based budgets

Question 27

What is historical figure budgeting?

Answer 27

Budgets which are based on historical data from previous years in the business
and are adjusted when needed

Question 28

What is zero based budgeting?

Answer 28

When all expenses must be justified for a new period or year starting from zer0

Question 29

What is a budget variance?

Answer 29

A difference between a figure budgeted and the actual figure achieved by the end of the budgetary period (e.g. twelve months)

Question 30

What is a variance analysis?

Answer 30

Seeks to determine the reasons for the differences in the actual figures and budgeted figures

(links with budget variance)

Question 31

What is a favourable variance?

Answer 31

Where the actual figure achieved is better than the budgeted figure

Question 32

What is a favourable variance in terms of revenue, profit or costs?

Answer 32

Revenue or profit- budget is where the actual figure is higher than the budgeted figure

Costs- Where the actual figure is lower than the budgeted figure

Question 33

What is an adverse variance?

Answer 33

When the actual figure achieved is worse than the budgeted figure

Question 34

What is an adverse variance in revenue, profit or costs?

Answer 34

Revenue or profit budget- Where the actual figure is lower than the budgeted figure

Costs budget- where the actual figure is higher than the budgeted figure