2.2- finance

• sales volume: 


  sales volume is the quantity of products sold in a specific period. Sales revenue / selling price
• sales revenue:

  sales revenue the money into your business through sales Selling price x sales volume
• fixed and variable costs: 


  fixed= costs that DO NOT vary with the level of output (rent, loan, insurance) variable= costs that DO change (raw materials, fuel, wage) Total variable costs= average variable costs x quantity sold
• total costs:

  Total costs= sum of all the costs in reaching a certain level of output Variable costs + fixed costs
• what is sales forecasting: 


  Estimates the volume or value of future sales using market research or past sales data.
• Purpose of sales forecasting:

  -avoid cash flow problems, free up management time as it allows owners to spend more time developing, production capacity can use sales to estimate if they need to increase or decrease production, employ more workers, start promotional activity
• Factors affecting sales forecasts:

  Consumer trends= tastes changing lead to product/service becoming less popular. Economic variables= affected by a range of economic variables (interest rates, exchange rates) Actions of competitors= may make decisions that can't be anticipated, may have big impact
• Difficulties of sales forecasting: 


  No guarantee that sales will meet that level- down to lots of uncertain factors Dynamic market- if market is constantly changing hard to predict Short term thinking- for some businesses a 1 year forecast will not be useful
• what is a budget: 


  is an estimate of income or expenditure for a set period of time
• purpose of budgets:

  Planning= owner can use a budget to help them plan for any expenses Forecasting= sales of revenue forecasts are typically based on a combination of the business sales history. Communication= owners can communicate their objectives of the business in a financial plan Motivation= careful finances
• Historical budgeting:

  Budget set for the business using current financial figures and based on historical performance. previous years income and expenditure are used as a base on which to build the budget figures for the next year
• Zero based budgeting: 


  Budget set for a business by using figures based on potential performance, methods takes away all historical assumptions and start a clean slate. usually used by a start up business
• Variances:

  Analyse the budget figures against what actually happens- there might be a variance. Favourable= actually figures are better than budgeted, costs lower than expected, revenue and profits higher than expected. Adverse= actual figures are worse than budgeted, costs higher thank expected, revenue and profits lower than expected
• Difficulties of budgeting:

  Budgets often fixed and difficult when business is dynamic, tendency for managers to spend up to the limit, time consuming to prepare, monitor and control, unrealistic budgeting can be demotivating, budgets can cause inter-department rivalry, can make managers short term and short sighted, become budget driven rather than customers
• strengths of break even analysis:

  allows a business to ask what if questions, help analyse best case and worst case, simple and straight forward way of discovering if business is viable, focuses entrepreneur on how long it will take a start up to reach profitability, margin of safety calculations show how much sales forecast can prove over optimistic
• weaknesses of break even analysis:

  unrealistic assumptions, products not sold at same price at different level of output, sales unlikely to be same as output, vc do not always stay the same, selling price may change as products are sold, break even analysis should be planning tool not decision tool.