2.2 financial planning

Question 1

What is a sales forecast?

Answer 1

They are predictions of future revenues based on past sales figures

Question 2

How do businesses use sales forecasts to determine resource requirements?

Answer 2

How many staff needed?
How much stock required?
Does capacity need to be expanded?
Does the equipment need upgrading?

Question 3

What factors affect sales forecasts?

Answer 3

Seasonal variations
Trends
Unemployment
Economic growth
Exchange rates
Competitor action

Question 4

Why is it difficult to accurately sales forecast?

Answer 4

Too much data
Dynamic changes
Hard to interpret
Lack experience in forecasting

Question 5

What is sales volume ?

Answer 5

Number of units sold by a business

Question 6

What is sales revenue?

Answer 6

value of the units sold by a business

Question 7

How do you calculate sales revenue ?

Answer 7

selling price x no. of units sold

Question 8

What are fixed costs?

Answer 8

are costs that do not change as the level of output changes

Question 9

What are variable costs?

Answer 9

costs that vary directly with the output

Question 10

What are totals costs?

Answer 10

FC + VC

Question 11

What is contribution?

Answer 11

this amount contributes towards paying off the fixed costs of the business
Once the fixed costs have been paid off, then the contribution starts to contribute to the profits of the business

Question 12

What is the break even point?

Answer 12

Total revenue = total costs so neither a profit or a loss is made

Question 13

Why do businesses want to know the break even point?

Answer 13

allows a business to understand how many items it needs to produce and sell to cover all costs before it starts to make a profit

Question 14

What is the margin of safety?

Answer 14

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

Question 15

What is the limitations of a break even analysis?

Answer 15

• less useful when a business produces more than one product
• accuracy relies on data in calculation
• revenue and total costs don’t always have a linear relationship with outputs
• assumes all output sold
• cannot be easily amended

Question 16

What is a budget?

Answer 16

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

Question 17

Why do businesses use budgets?

Answer 17

Planning
Control
Coordination
Communication
Motivation

Question 18

What are the two types of budgets ?

Answer 18

Historical - financial plan that a business (or department in the business) sets about costs and revenue

Zero based - not to allocate budgets and all spending to be justified which means that many unnecessary costs can be eliminated

Question 19

Why can zero budgeting be a problem?

Answer 19

– It can be time-consuming as evidence to support spending decisions needs to be collected and presented
– Zero budgeting also requires skilled and confident employees to make a persuasive case to convince those making purchasing decisions

Question 20

What is variance analysis?

Answer 20

difference between a figure budgeted and the actual figure achieved by the end of the budgetary period

Question 21

What is a favourable variance?

Answer 21

Where the actual figure achieved is better than the budgeted figure

Question 22

What is an adverse variance?

Answer 22

An adverse variance is where the actual figure achieved is worse than the budgeted figure

Question 23

What is the difficulties of budgeting?

Answer 23

Conflicts between business function
Encourage short termism
Unachievable impacts motivation
Only as good as data given
Must be constantly reviewed