2.7 Financial Planning

Question 1

Sales Volume definition?

Answer 1

The number of units sold

Question 2

What is sales revenue (turnover)?

Answer 2

The amount of money made from sales

Question 3

What are sales forecasts?

Answer 3

Predicting future sales volume and sales revenue based on past sales data and market research

Question 4

How does sales forecasting help a business make decisions about finance?

Answer 4

Sales forecast help the business generate accurate cash flow forecasts due to sales revenue is usually a firms main source of cash inflow.

Question 5

How does sales forecasting help a business make decisions about marketing?

Answer 5

The forecast can tell if sales are going to increase or decrease so a business can create a campaign when sales are low.

Question 6

How does sales forecasting help a business make decisions about resources?

Answer 6

Makes sure the business has all the resources it needs to run

Question 7

Factors affecting sales forecasting?

Answer 7

. Consumer trends
. Economic variables
. Actions of competitors

Question 8

How do economic variables affect sales forecasting?

Answer 8

It changes how much money the consumer can spend affecting the sales of a business

Question 9

How do the actions of competitors affect sales forecasting?

Answer 9

What a competitor does can decrease your sales. E.g they reduce their prices

Question 10

How do consumer trends affect sales forecasting?

Answer 10

Sometimes they are fairly predictable but at other times they are uncertain

Question 11

Sales revenue Calculation?

Answer 11

Sales revenue= Selling price X Sales volume

Question 12

Sales Volume Calculation?

Answer 12

Sales volume= Sales revenue/Sales price

Question 13

Do fixed costs change with output?

Answer 13

NO!!!

Question 14

Examples of fixed costs not changing with output

Answer 14

Rent on a factory, basic salaries, new machinery…

Question 15

What is profit?

Answer 15

The difference between revenue and costs

Question 16

Calculation for Profit?

Answer 16

Profit = Total revenue - Total costs

Question 17

What is the break even point?

Answer 17

The level of sales a business needs to cover its total costs

Question 18

What happens when sales are below the break even point?

Answer 18

The costs are more than the revenue meaning the business makes a loss

Question 19

What happens when sales are above the break even point?

Answer 19

The revenue exceeds the costs meaning the business makes a profit

Question 20

Why do established businesses use break even analysis?

Answer 20

When launching new products they use break even analysis to work out how much profit they are likely to make

Question 21

What is Contribution per unit?

Answer 21

The difference between the selling price of a product and the variable costs it takes to produce it

Question 22

Calculation for contribution per unit?

Answer 22

Contribution per unit= selling price -variable cost per unit

Question 23

What is total contribution (contribution from all units) used for?

Answer 23

paying fixed costs and the amount left over is profit

Question 24

What is the break even point?

Answer 24

Where total contribution= fixed costs

Question 25

Calculation for Break-even point

Answer 25

Break-even point= total fixed costs/ contribution per unit

Question 26

What do break even charts show?

Answer 26

Costs and revenue plotted against output

Question 27

Where is the break even point on a break even chart?

Answer 27

Where the revenue line crosses the total costs line

Question 28

What is the margin of safety?

Answer 28

it is the amount between actual output and break even

Question 29

calculation for margin of safety?

Answer 29

Margin of safety= actual output- break even output

Question 30

Advantages of using break even analysis?

Answer 30

. it’s easy to do (its just plotting figures on a graph accurately)
. It’s quick
. Lets the business forecast how variations in sales will affect costs, revenue and profits.
. Lets the business forecast how variations in priced and cost will affect how much they need to sell.
. helps persuade sources of finance to give them money
. influences decisions on whether new products are launched or not.

Question 31

Disadvantages of using break even analysis?

Answer 31

. Assumes variable costs rise steadily
. Simple for single products
. If the data is inaccurate, then the results will be wrong
. Assumes the business sells all the products without any wastage
. doesn’t tell you how many units you are going to sell

Question 32

What do budgets do?

Answer 32

They forecast future earnings and future spending (usually over a 12 month period)

Question 33

What are income budgets?

Answer 33

They forecast the amount of money that will come into the business as revenue

Question 34

How do income budgets work?

Answer 34

The business needs to predict how much it will sell and at what price. This is usually done by using previous years sales figures

Question 35

What are Expenditure budgets?

Answer 35

They predict what the businesses total costs will be for the year (taking into account both fixed and variable costs)

Question 36

How does the profit budget calculate the expected profit (or loss) for the year?

Answer 36

Income budget - Expenditure budget