2.2 Flashcards
(17 cards)
Sales forecast definition
Sales forecast is a prediction of expected level of sales revenue expected for a business for a future period
ADV of sales forecasting
- Plan for future sales= help manage costs
- Increases motivation as can be set as target to achieve
- Helps determine production capacity
DIS of sales forecasting
- Volatile customer tastes/prefrences= decreases accuracy of sales forecast
- External factors may affect accuracy of forecasts
- New businesses have no historical data
3 Factors affecting sales forecasts
- Consumer trends eg tastes
- Actions of competitors eg promotion of competitor products may decrease sales for our business
- Economic variables eg inflation, exchange rates, unemployment
Formula for:
Sales revenue
Total cost
Average cost
Profit
Sales Revenue = Price × Quantity Sold
Total Costs = Fixed Costs + Variable Costs
Average cost = Total Costs/Output
Profit= Total revenue-Total costs
Define fixed and variable costs and give examples
-Fixed Costs: stay the same regardless of output
e.g. rent, salaries, insurance
-Variable Costs: change depending on output
e.g. raw materials, packaging
-Define breakeven and give formula
-Give formula for contribution
-Define MOS and give formula
Breakeven point- total revenue = total cost, point at which firm makes no profit and no loss
TR=TC
Break-even= Fixed Cost/Contribution per unit
Contribution= Selling price per unit–Variable cost per unit
MOS- the difference between actual sales and breakeven sales
MOS= Actual sales-Breakeven sales
What does high and low MOS means
High MOS= good
Low MOS= bad as any effect on output/demand could lead to a loss
ADV of break-even
- Simple and easy to use= allows for quick estimations
- Useful guideline to help businesses make decisions
- Can be used to analyse the impact of varying customers,prices and costs on a businesses profits
- Illustrates the importance of keeping fixed costs low as higher fixed costs= higher break-even point
DIS of break-even
- Revenue is not always linear in line with sales as there can be discounts at various levels of sales
- Total costs and revenue dont always have a linear relationship with output
- Assumes all output is sold
- Assumes that firms sell products at the same price
- Only takes into account one product so hard to do if firm has multiple products
What is a budget and it’s purpose
A budget is a financial plan for the revenues and costs expected to be incurred or received by a business
Purpose of budgets
- Setting targets
- Motivating staff
- Monitor performance
- Improve efficiency
Types of budgets
- Historical- budgets made using data from previous years-based on historical data and adjusted for inflation or expected changes.
- Zero-based budgets- A budgeting method where the budget starts from zero, and all expenses must be justified for each new period meaning opportunity cost of spending is considered- time consuming
• Historical Budgeting
-Based on past data
-Adjusted for inflation or business changes
-Simple and quick, but might not reflect current conditions
• Zero-Based Budgeting
-Starts from scratch each time
-Every cost must be justified before approval
-More accurate, but time-consuming
Variance analysis definition and formula and meaning of favourable and adverse
Variance analysis compares the forecast data to actual data
Variance = Actual Figure – Budgeted Figure
Favourable (F) – when actual performance is better than budgeted e.g. costs are lower or revenue is higher
> Positive or over budget
Adverse (A) – when actual performance is worse than budgeted e.g. costs are higher or revenue is lower
> Negative or under budget
ADV of budgeting
- Motivating to staff
- Measures performance
- Target setting
DIS of budgeting
- A budget is only as accurate as the data on which it is based on. Inaccurate data=useless budget
- Time consuming and requires skill
- Unexpected changes in process eg commodity prices can impact budgets
- When budget unrealistic is loses all value as motivational tool
- External factors eg PESTLE change budget
