2.2 Financial Planning

• Sales Forecasting

  Predicting future levels of sales
• Reasons for Sales Forecasting

  • Production/capacity plans
  • Managing Staff Levels
  • Predict breakeven
  • Comparisons to competitors
• Factors affecting Sales Forecasting

  • Disposable Income
  • Trends
  • Competitors
  • Economic variables
  • Demand
  • Global events
• Factors which affect Demand:

  • Prices
  • Incomes
  • Tastes and Fashions
  • Competitors
  • Seasonal Changes
  • Changing technology
  • Government decisions
• 2 ways to increase revenue:

  • Increase quantity sold
  • Achieve a higher selling price
• Why Profit is so important to businesses

  • Motivating
  • Source of Finance
  • Reward for taking risks
  • Return of investment
• Reasons for Cash Flow Forecasting

  • advanced warning of cash shortages
  • making sure business can pay employees and suppliers
  • spot problems with customer payments
  • financial control
  • reassurance of good business management
• Problems with Cash Flow Forecasts

  • Customers do not pay on time
  • costs prove higher than expected
  • imprudent costs assumptions
  • sales prove lower than expected
• Contribution

  Profit made on individual products

  Used in calculating how many items need to be sold to cover all business' total costs
• Margin of Safety

  • The Difference between actual output and the breakeven output over which a profit is made
• Strengths of Breakeven Analysis

  • Focuses on what output is required
  • helps management and finance-providers better understand the risk of the business idea
  • illustrates importance of keeping fixed costs to a minimum
  • calculations quick and easy
• Limitations of Breakeven Analysis

  • Unrealistic assumptions
  • sales unlikely to be the same as output
  • variable costs not always the same
  • most business sell more than 1 product
• Budget

  • A financial plan for the future
  • Concerns the revenues and costs of a business
• 3 Types of Budgets

  • Revenue
  • Cost
  • Profit
• Historical Budget

  • Using last year's figures as basis for the budget
  • Realistic and based on actual results
  • However, circumstances may have changed
  • Doesn't encourage efficiency
• Zero-based Budget

  • Budgeted costs and revenue set to zero
  • Based on new proposals
  • makes budgeting more complicated and time consuming
  • realistic
• 2 key sources of info for budgets

  • Financial performance in previous periods
  • Market Research: competitor activity, customer feedback, market trends
• Difficulties in Budgeting Accurately:

  • harder when market experiences rapid change
  • start-up firms find it hard to predict likely sales
  • competitors actions difficult to predict
  • likely to be unexpected costs
  • changes in external environment impacts costs
• Variance

  • Difference between actual results vs budgeted results
• Favourable Variance

  • Actual figures are better than budgeted figures
  • e.g costs are lower than expected
  • e.g revenue/profits are higher than expected
• Adverse Variance

  • Actual figure worse than budget figure
  • e.g costs higher than expected
  • e.g revenues/profits lower than expected
• Possible causes of favourable variances:

  • stronger market demand than expected - therefore higher revenue
  • selling price increases above budget
  • competitor weakness - means higher sales
• Possible causes of Adverse Variables:

  • Over Optimistic sales forecast
  • market conditions (competition) which results in lower selling price
• Limitations of budgets

  • Inflexible
  • regularly needs changing as circumstances change
  • takes time to complete and manage
• Liquidity

  • the ability of a business to quickly convert assets into cash in order to pay off short-term liabilities
• Ways to improve Liquidity:

  • better cash flow management
  • control and reduce costs
  • increase revenue
  • access external financing
• Importance of Working Capital

  • ensures operational efficiency - ensures businesses are paying suppliers and meeting payroll
  • helps maintain liquidity