Flashcards in 2.2 Financial planning Deck (33)
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1
Define sales forecasting
The process of predicting future sales
2
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
3
What are factors which effect sales forecasts (consumer trends)
Increase demand
Healthier trends
Demographics
Globalisation
Affluence (richer spend more on luxuries)
Economic variables
Value of the pound
Changes in taxation
Inflation
4
What are factors that effect sales forecasts (actions of competitors)
Changing price (competitors can cut price)
Launching new products
Promotional campaigns
5
What is the difficulty of sales forecasting
Can be hard to extrapolate as future outcomes are hard to predict
6
What does sales volume and sales revenue measure
Measures how much a business has sold
7
What is the formula for sales revenue
= Sales volume x selling price
8
Define fixed costs
Are costs which do not change with the businesses level of output
E.g. rent, salaries, advertising spending
9
Define variable costs
Costs that change in direct proportion to the level of output
E.g. Fuel costs, raw materials
10
What is the formula for total costs
Fixed costs + variable costs
11
Define break evenn
The point where a business is selling enough to just cover costs without making a profit
12
What is the formula for break even
= Fixed costs / (selling price - variable cost per unit)
13
What are the three lines on a break even graph
Revenue
Total costs
Fixed costs
14
Define margin of safety
The difference between the actual level of output and the break even level of output
15
What factors can change a break even chart
Selling price change
Variable cost per unit change
Fixed costs change
16
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
17
Define Budgets
A financial plan for the future concerning the revenues, costs and profits of a business
18
Who is responsible for budgets
Managers are responsible for controllable costs within their budgets
19
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
20
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
21
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)
22
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
23
What is variance analysis
Involves calculating and investigating the differences between actual results and the budget
24
What are favourable variances
When the actual figures are better than the budgeted figure
25
What are adverse variances
When the actual figures are worse than the budgeted figure
26
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
27
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
28
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
29
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
30
Why do smaller businesses not use budgeting
Because it is to time consuming
31
What is the formula for margin of safety
Actual output - Break even level of output
32
Define capital gain
Is the profit made from selling a share for more than it was bought
33
