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Flashcards in 2.2 Financial Planning Deck (66)
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Formula for sales revenue

sales volume x selling price


What are fixed costs

-costs that do not change as output changes

-linked to time (e.g. rent) rather than how busy the business is

-price always stays same- even when business isnt producing/ when business is producing loads


How does a rise in sales affect fixed costs

a rise in sales spreads fixed cost over more units- meaning fixed cost per unit is lower


Give examples of fixed costs



What are variable costs

-costs that change depending on output

-e.g. if manufacturer doubles amount produced- material costs would double


Give 3 examples of variable costs

-raw materials
-fuel costs


What are total costs

-adding together fixed and variable costs


Formula for total variable costs

variable cost per unit x number of units produced (output)


What is sales forecasting

Sales forecasting is the process of estimating future revenue by predicting the amount of product or services will be sold


Name 4 purposes of sales forecasting

-HR plan- ensures staff with right skills are employed and correct number of staff are at work

-marketing budgets- business

-profit forecasts and budgets- when planning how much firm is expecting to make in rev profit- basis will be accurate sales forecasts- help shape expectations of spending

-production planning- to satisfy demand for product businesses need to ensure enough materials are brought and enough products are made- work back from sales forecasts


Name 4 factors affecting sales forecasts

consumer trends

economic variables -> inflation

actions of competitors


What is a trend

general path that a variable takes over a period of time


How do consumer trends affect sales forecasting

-tastes and habits change as time passes so effective sales forecasting must allow for changing of this


Give examples of possible consumer trends

-demographics- ageing pop- increased demand for products aimed at elderly

-globalisation- increased willingness to buy products which recognises global nature of todays world

-affluence- consumers have befome wealthier- more able/ willing to spend on luxuries

-economic variables- brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products


How do economic variabkes affect sales forecasts

brand need to be aware of impact on demand if consumers incomes change- recession —> major impaxt on elastic products


How does changes in individual economic variavles effect sales

-name 3 ways

-value of pound- decrease in value of pound makes imports more expensive- push buyers to buy UK-produced products

-changes in taxation-taxes on individual items can affect demand, as well as general taxation (VAT)

-inflation- higher than rate of increase of average incomes- consumers would need to spend less- decrease in sales


Name 3 ways actions of competitiors can affect sales

-changing price- competitor that undercuts ur price- likely to steal sales- making sales forecast optismic

-launching new products- launch of new prodyct or new competitor can have negafive effect on forecasted sales

-promotional campaigns- competitors running succesfdul campaigns- steal market share- make sales forecasts look optimistic


Name a difficulty of sales forecasting

-extrapolation- sales forecasting assumes past trends will continue



Name the 3 methods of sales forecasting



confidence intervals


What is extrapolation

-uses trends established from historical data to forecast future


What is correlation

looks at strength of relationship between 2 variables


What are confidence intervals

gives % probability that estimated range of possible values includes the actual value estimated


Name 3 circumstances where sales forecasts are likely to be inaccurate

new business

product is a fashion item

demand is hughly sensitive to changes in price and income (elasticity)


how do you work out % change

new - old/ old x100


What are the 3 types of correlation

-positive correlation- relationship where independent variable increases so dies dependent v

-negative correlation- negative relationship exists where independent v increases and dependent v decreases in value

-no correlation- no discernible relationship between independent and dependent


What is breakeven

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


To calculate breakeven what does a business need to know

-seling price
-variable costs per unit
-fixed costs


Give the formula for breakeven

fixed costs/ (selling price - variable costs per unit)


What should the fixed cost line always be on a graph and why

-fixed cost line should always be flat
-as costs are at the same level of output


Where should the total cost line always be on the graph and why

-starts on left at the fixed cost line
-as it shows the effect of adding fixed costs and variable costs


Where should the total revenue line always be on the graph and why

-starts at point (0,0)
-as no revenue is generated if nothing is sold


Where is the breakeven output line on the graph and what does it tell you

-identified by dropping a vertical line from the point where TR and TC cross
-tells you the amount of output needed to be sold to cover costs


definition of overhead costs

costs incurred by business as a whole


definition of budgets

target for revenue/ costs for future time period


Name the 2 things budgets are set for



What is income budget

sets target for value of sales to be achieved


What is expenditure budget

gives budget-holders a limit under which they must keep their departments costs


Name 3 purposes of budgets

-focus on expenditure on companys main objectives for a time period

-expenditure budgets -> ensure department doesn’t spend more than company expects

-motivate staff to try and hit certain targets


Name the 2 types of budget

-historical budget
-zero-based budget


What is a historical budget

budget set using last years budget as a guide
-adjustments would be made for forseeable changes


What is a zero-based budget

setting budget to zero each year expecting budget holder to justify need for every pound they ask for


What is variance analysis

looking back to calculate difference between budgeted figure and actual figure that occurred


Name the 2 types of variances



What is adverse variances

when actual figure was worse than budgeted figure


What are favourable variances

when actual figure was better for business than the budgeted figure


What effect would it have on profit if the actual was lower than the budget in terms of income

-what variance would this be as a result

profit would be lower than expected


What effect would it have on profit if the actual was higher than the budget in terms of income

-what variance would this be as a result

profit would be higher than expected


What effect would it have on profit if the actual was lower than the budget in terms of expenditure

-what variance would this be as a result

profit would be higher than expected


What effect would it have on profit if the actual was higher than the budget in terms of expenditure

-what variance would this be as a result

profit would be lower than expected


Name 3 reasons as to why budget variances occur

-original budget was unrealistic

-target was not met due to factors beyond budget holders control

-target was not met due to factors within budget holders control


Name 4 difficulties with budgeting

-setting budgets
-agreeing budgets
-failing to understand causes of budget variance
-costs of system outweight benefits


Why can setting budgets be hard

hard to ensure targets are set realistically


Why can agreeing budgets be hard

less motivating and effective than giving budet-holders a genuine say in setting their own targets


Why can failing to understand causes of budget variance be hard

blaming budget-holder for failing to meet impossible target- demotivating


Why can the costs of system outweigh benefits be hard

less need for financial control to be delegated- single boss may be able to keep eye on all finances


What is contribution

amount of money left after deducting VC from sell price

-contributed towards fixed costs and then profit


Give the formula for contirbution

total sales - total varaible price


Give the formula for contirbution per unit

(selling price - variable cost) per unit


Total contribution formula

contribution per unit x number of units sold


How can you calculate profit using contribution

( total revenue - total unit cost ) - fixed costs


When is the breakeven point

when total sales = total costs


What is the margin of safety

difference between actual output and the breakeven point


What are some advantages of breakeven?

- focuses on what output is required to reach profitability

- helps management + finance providers better understand risk of business

- shows importance of keeping fixed costs to a minimum

- calculations are quick and easy


What are limitations to breakeven?

- unrealistic assumptions (products not sold at same price at differant levels of output

- sales are unlikely to be same as output ( build up of stock)

- variable costs dont always stay the same

- most businesses sell more then one product

- planning aid rather then decision making tool


What is profit budget

difference between sales revenue budgets and expenditure budgets


What is a limitation of budgeting revenue too low

budget: 700
actual: 800

-if budgeting was more accurate- business would be able to forsee £800 revenue- so actual figure couldve been higher

-as budget of 800- motivate workers beyond that figure- so business couldve produced an actual of 850