2.2 Financial planning

Question 1

purpose of sales forecast

Answer 1

estimate future sales levels or revenue generated by a business

planning and budgeting - basis for developing strategies, sales targets, and budgets

resource allocation - productive capacity, inventory levels, marketing efforts, workforce planning

performance evaluation - benchmark to assess actual sales performance against projected targets

financial projections - essential inputs for financial projections, help businesses project revenue, cash flow, and profitability for financial planning and decision making

Question 2

factors affecting sales forecasts

Answer 2

consumer trends - consumer preferences, behaviors, demographics, purchasing patterns

economics variables - GDP growth, inflation rates, interest rates, employment levels, consumer confidence

action of competitors - competitor strategies, product launches, pricing decisions, marketing campaigns, and market positioning

Question 3

difficulties of sales forecasting

Answer 3

uncertainty - predicting future outcomes is risky bcz of market dynamics, changing consumer behavior, and external factors

lack of historical data - new businesses or product launches may not have historical sales data which mean forecasting can be more challenging and may be inaccurate

seasonality and cyclical patterns - seasonal variations and cyclical trends can make it difficult in accurately forecasting sales as demand fluctuates

complex market factors - market saturation, technological advancements, regulatory changes, geopolitical events, can all complicate forecasting

Question 4

sales volume

Answer 4

quantity of units sold during specific period of time

Question 5

sales revenue

Answer 5

unit sales x selling price per unit

Question 6

fixed costs

Answer 6

expenses that do not change with level of production or sales volume

Question 7

variable costs

Answer 7

expenses that vary in direct proportion to the level of output or sales volume

variable cost per unit x number of units

Question 8

contribution

Answer 8

sellice price - variable cost per unit

Question 9

break even point

Answer 9

total fixed costs + total variable costs = total revenue

Question 10

calculate break even point

Answer 10

break-even point (in units) = total fixed costs / contribution per unit

Question 11

margin of safety

Answer 11

(actual sales - break even sales) / actual sales

Question 12

limitations of break even analysis

Answer 12

assumptions - like fixed and variable costs, constant selling price, and linear cost-volume-profit

simplified model - BEA implied complex business dynamics by assuming linear relationships - ignores factors like market demand fluctuations, economies of scale, pricing strategies, or seasonality

limited scope - BEA provides insights into profitability at specific sales volume - does not consider other imp factors like market comp, pricing strats, market share, or long term sustainability

single product focus - BEA more suitable for businesses with single product or uniform pricing structures - becomes more complex in multi product or variable pricing scenarios

Question 13

purpose of budgets

Answer 13

plan, allocate, and control finacial resources

financial planning - help sets financial goals, forecast revenue and expenses, and allocate resources efficiently

resource allocation - funds, manpower, materials to different departments or projects based on priorities

performance evaluation - provide benchmark for measuring actual performance against planned targets, facilitating performance evaluation and identify areas for improvement

decision making - budgets aid in making informed decisions by providing a framework to assess financial implications of different options

control and accountability - budgets establish financial control mechanisms ensuring that actual financial outcomes are monitored

Question 14

types of budgets

Answer 14

historical figures
-involves using past financial data
-adjusts them for expected changes

zero-based
-starting from scratch
-evaluate and prioritize all expenses or activity

Question 15

variance analysis

Answer 15

compares actual fianncial performance against budgets amounts to identify and understand reasons for differences (variances)

helps business identify areas of success or concern, take corrective actions, and improve future budgeting accuracy

Question 16

difficulties of budgeting

Answer 16

uncertainty - predicting future outcomes in an uncertain business

complexities in forecasting - forecasting future revenues can be challenging due to seasonality, economic conditions, competition, or evolving customer behavior

lack of participation and communication - ineffective involvement + comms w/stakeholders can hinder accuracy and acceptance of budgets

rigidity and lack of flexibility - budgets can become rigid and restrictive if not adaptable

time and resource - developing, monitoring, and managing budgets require sig time, effort, and resources