2.2

• Consumer trends

  Habits and behaviours of consumers around the products they buy and how they use them

  • Aim to meet needs by providing products or services
  • Successful businesses anticipates needs of consumers
  • Demand changes for items overtime
• Sales forecasting

  • Predicting future trends based on past data
  • Businesses may want to predict
  • Sales of a product
  • Effect of promotion on sales
  • Changes in market size
• Long term trends

  • Long term changes
  • Affect sales forecasting and business strategies
• Fashion

  • Consumer preferences can be unpredictable
  • Difficult to forecast sales
• Seasonal variation

  • Purchases in different amounts during different seasons
  • Results in different cash flow
• Economic variables

  • Measurements of different aspects of the economy that give indication of how the economy is performing
• Economic growth

  • Judged by using gross domestic products.(measure of the total output of the economy)
  • An increase in economic growth means and increase in business sales
• Interest rates

  • Changed by banks and financial institutions
  • An increase in interest rates means a higher cost of loans which decrease the demand for loans
  • An increase in interest rates means a decrease in sales forecast
• Exchange rates

  • Increased exchange rates means it will be cheaper to import goods
  • UK business sales will be low due to foreign competitors
  • UK good will be more expensive for those abroad
  • Sales forecast should decrease
• Unemployment

  • During a recession unemployment rises
  • Economic crisis in 2008 made 3million unemployed
  • When unemployment is high sales forecast is low
• Unemployment

  • Rises during a recession
  • Spending falls
• Actions of competitors

  • Where competitors use a strategy to gain market share, sales forecast needs to decrease
  • Significant actions by competitors will make time series data a less reliable source of data
• Extrapolation

  Using trends established from historical data to forecast the future

  • Advantages
  • Simple
  • Not much data required
  • Quick and cheap
  • Disadvantage
  • Unreliable if fluctuations in past data
  • Assumes past trends will continue in the future
• Expert opinion

  • Can be subjective
  • Can be wrong
  • Different experts have different views
• Range of data

  •  Not very accurate
  • Not easy to collect data
  • Data can change
• Sales revenue

  • The value of output sold - Calculated price x quantity of output
• Sales volume

  • This is the quantity of output sold in a particular time period
• Variable cost

  • A cost that rises as output rises
• Fixed cost

  • A cost that does not change as a result of a change in output in the short run
• Average cost or unit cost

  • The cost of producing one unit. Calculated by dividing the total cost by the output
• Total costs

  • All fixed and variable costs added together
• Contribution per unit

  Selling price – variable cost

  
• Total contribution

  Unit contribution × number of units sold

  
• Profit

  Total contribution – fixed costs

  
• Break even output

  Fixed costs ÷ contribution per unit

  
• Margin of safety

  Actual level of output – breakeven point

  
• Limitations of break-even analysis:
• Assumes all output is sold so that output equals sales (no stocks are held)
• Assumes unchanging conditions, such as the break-even chart being drawn for a given set of conditions, unable to cope with sudden increases in wages and prices
• Accuracy of data depends on the quality of the data used
• Multi-product businesses need multiple graphs as each product has different unit costs and prices
• Some fixed costs are stepped, for example, needing more capacity may increase rent as a larger building is required
• Some relationships are not linear, sometimes total revenue and total cost aren't linear but form more of a curve
• Variance

  • A budget can turn out favourable or adverse
  • This is decided by comparing the actual output/revenue/sales to the budget made
• Causes of Favourable variance

  • Stronger market demand
  • Selling price is higher than a budget
  • Cautious sales forecast assumptions
  • Competition weakness
  • Better than expected efficiency
• Causes of Adverse variance

  • Unexpected events leading to unbudgeted costs
  • Overspends
  • Sales forecast is overoptimistic
  • Competition pricing force selling prices to be lower than budgeted
• Benefit of budgets - Monitoring

  • Set up objectives
  • Success can be viewed in relation to the budget
• Benefit of budgets - Planning

  • Forces people to think ahead
  • Anticipates problems and solutions
• Benefit of budgets - Co-ordination

  • Managers can control and coordinate different areas
• Benefit of budgets - Communication

  • Removes uncertainty of decision making
  • Clear plan in place