Section 7 - Financial Planning

• Sales forecasts


  Predicting future sales based on past sales data and market research
• Sales forecasts


  • Help businesses make decisions about finance, marketing, and resource planning
• Sales are usually a firm's main source of cash inflow, so sales forecasts help get accurate cash flow forecasts</b>
• Sales forecasts help a firm to know when to prevent running out of cash
• Sales are forecast to decline


  A business may decide to launch a promotional campaign to increase sales and cash inflow
• Sales forecast identifies seasonal peaks in sales


  A firm can increase productive capacity during busy times by hiring additional temporary staff
• Factors that affect sales forecasting


  • Economic trends
  • Actions of competitors
  • Unpredictable changes in consumer behaviour
• Accurate sales forecasts are very hard to make, especially in dynamic markets when external factors are constantly changing
• It can be difficult to know in advance how factors will change and predict the impact on sales
• Firms have to make their best guess, but it can be difficult to make accurate sales forecasts very far into the future
• Sales volume


  The number of units sold in a given time period
• Sales revenue


  The total amount of money received from sales, before any deductions
• Fixed costs


  Costs that don't change with output, e.g. rent, business rates, senior managers' salaries
• Variable costs


  Costs that rise and fall as output changes, e.g. hourly wages, raw materials, packaging
• Profit


  The difference between total revenue and total costs
• Break-even point


  The level of output where total revenue equals total costs
• Contribution


  The amount left over from each sale after variable costs have been covered, to pay for fixed costs and profit
• Break-even charts


  • Show how costs and revenue vary with different levels of output, and identify the break-even point
• Margin of safety


  The amount by which actual output exceeds break-even output
• Advantages of break-even analysis


  • Can plot figures on a graph to visualise the break-even point
  • Helps businesses forecast the minimum sales required to make a profit
• Disadvantages of break-even analysis


  • Assumes all units produced are sold, which isn't always the case
  • Doesn't account for variations in prices and costs
  • Doesn't tell you how many units you'll actually sell
• Budget


  A financial plan for the future, covering expected income and expenditure
• Types of budget


  • Sales budget
  • Expenditure budget
  • Cash budget
• Budgets


  • Help everyone in the firm work towards achieving sales and expenditure targets
  • Are a coordination tool to ensure different parts of the business are aligned
• Break-even analysis


  Identifying the point at which total revenue equals total costs, so the business makes neither a profit nor a loss
• Break-even analysis


  • Used by businesses to make decisions and plans
  • Advantages and disadvantages
• Break-even analysis is a tool that helps businesses identify the point at which total revenue equals total costs
• Budget


  A financial plan for the future
• Types of budgets


  • Income budget
  • Expenditure budget
  • Cash flow budget
• Budget setting process


  1. Research sales predictions

  2. Research costs

  3. Negotiate budgets with budget holders
• Budgets


  • Help control income and expenditure
  • Help managers make decisions
  • Help focus on priorities
  • Used as a communication tool
  • Help departments coordinate
• Drawbacks of budgeting


  • Can cause resentment between departments
  • Can be restrictive
  • Time-consuming
  • Inflation hard to predict
• Historical budgeting


  Updating the previous year's budget with percentage increases/decreases
• Zero-based budgeting


  Starting the budget from scratch each year, budget holders have to justify all spending
• Fixed budgeting


  Budget holders have to stick to their budget plans even if market conditions change
• Flexible budgeting


  Budgets can be altered in response to significant changes in the market or economy
• Variance


  The difference between actual figures and budgeted figures
• Variances can be favourable (better than expected) or adverse (worse than expected)
• Causes of variances


  • Changes in customer behaviour
  • Changes in costs of labour, materials, overheads
  • Improvements in efficiency
• Variance analysis


  1. Identifying and explaining variances

  2. Taking action to address variances