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Flashcards in 2.2 Financial planning Deck (33)
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Define sales forecasting

The process of predicting future sales


What is the purpose of sales forecasting

What is it the basis for

To ensure each functional area is able to operate effectively

HR plan - ensure right number and skilled staff are employed
Marketing Budget- How to allocate marketing budget
Profit forecasts and budgets - plan of how much revenue and profit they are expected to make
Production planning- ensuring enough products are made


What are factors which effect sales forecasts (consumer trends)

Increase demand
Healthier trends
Affluence (richer spend more on luxuries)
Economic variables
Value of the pound
Changes in taxation


What are factors that effect sales forecasts (actions of competitors)

Changing price (competitors can cut price)
Launching new products
Promotional campaigns


What is the difficulty of sales forecasting

Can be hard to extrapolate as future outcomes are hard to predict


What does sales volume and sales revenue measure

Measures how much a business has sold


What is the formula for sales revenue

= Sales volume x selling price


Define fixed costs

Are costs which do not change with the businesses level of output
E.g. rent, salaries, advertising spending


Define variable costs

Costs that change in direct proportion to the level of output
E.g. Fuel costs, raw materials


What is the formula for total costs

Fixed costs + variable costs


Define break evenn

The point where a business is selling enough to just cover costs without making a profit


What is the formula for break even

= Fixed costs / (selling price - variable cost per unit)


What are the three lines on a break even graph

Total costs
Fixed costs


Define margin of safety

The difference between the actual level of output and the break even level of output


What factors can change a break even chart

Selling price change
Variable cost per unit change
Fixed costs change


What are the limitations of break even analysis (5)

Assumes all output is sold
Assumes there are no sudden changes in demand
Possibility of inaccurate data
Assumes that the total costs curve is straight, not taking into account economies of scale
A business can sell more than one product


Define Budgets

A financial plan for the future concerning the revenues, costs and profits of a business


Who is responsible for budgets

Managers are responsible for controllable costs within their budgets


What are the uses of budgets in a business

Set targets and objectives
Assign responsibilities
Allocate resources
Communicate targets
Motivate staff
Forecast outcomes
Control income and expenditure


What are the three main types of budgets

Revenue budget : expected revenue
Cost budget : expected variable and fixed costs
Profit budget : based on the combined sales and cost budget


How a profit budget constructed

Analyse the market (market size and share)
Draw up revenue budget (sales forecast, new products and changing prices)
Draw up the cost budget(include contingencies, based on sales budgets)


What are the potential drawbacks of budgeting
Explain them

Sales forecasting - market experiences rapid change, hard to estimate sales and revenue, competitor actions difficult to predict

Costs - likely to be unexpected costs, varies depending on sales budgets, changes in environment will impact costs


What is variance analysis

Involves calculating and investigating the differences between actual results and the budget


What are favourable variances

When the actual figures are better than the budgeted figure


What are adverse variances

When the actual figures are worse than the budgeted figure


What is the variance analysis when the budgeted operating profit was £15000 and the actual operating profit was £12000

Actual 12,000 - budgeted 15000 = 3,000 adverse finance


What are the possible causes of favourable variances

Stronger demand than expected
Selling price increased higher than budget
Cautious cost assumptions
Better than expected productivity


What are the possible cause of adverse finance

Unexpected events leads to un budgeted costs
Overspending by budget holders
Sales forecasts are over - optimistic
Market conditions means demand is lower than budget


What ate the two types of budgets

A historical budget : using last years budget as a guide then making adjustments

A zero based budget : setting budget at 0 and budget holders justify budgets, very time consuming


Why do smaller businesses not use budgeting

Because it is to time consuming


What is the formula for margin of safety

Actual output - Break even level of output


Define capital gain

Is the profit made from selling a share for more than it was bought


Give the formula for budget variance

Budgeted amount - actual amount