2.2 Financial Planning

• Sales forecasts


  Predict future revenues based on past sales figures
• Sales forecasts commonly focus on the future, though they often use past data to make predictions
• Consumer trends


  Patterns of behaviour and preferences among consumers regarding their purchases of products
• During periods of economic growth

  Increased consumer incomes can lead to higher than forecast sales for many products
• Inflation


  The general increase in prices over time, which reduces consumers' spending power
• Increased levels of unemployment


  Can lead to lower sales than forecast
• Exchange rate


  The value of one currency in terms of another
• Competitor actions should be considered in sales forecasts
• Sources of data for sales forecasts

  • Past sales data
  • Government data
  • Media coverage
  • Trade body predictions
  • Competitor performance
• Experience bias


  The forming of opinions about the future based on experiences in the past
• Sales volume


  The number of units sold by a business
• Sales revenue


  The value of the units sold by a business
• Sales revenue usually increases as the sales volume increases
• Fixed costs (FC)


  Costs that do not change with the level of output and have to be paid even if output is zero
• Formula to calculate total costs (TC)

  Total costs = Fixed costs + Total variable costs
• Variable costs (VC)


  Costs that are directly linked to the level of output. They increase as output increases and decrease as output decreases
• Formula to calculate sales revenue

  Sales revenue = Selling price x Number of items sold
• Total costs usually increase as the sales volume increases
• Contribution


  A product's selling price minus the variable costs directly involved in producing that unit
• Average unit costs usually decrease as the sales volume increases as fixed costs are spread across more units
• Break even point


  The level of output at which total revenue equals total costs, resulting in neither profit nor loss
• The break even point indicates the level of output at which neither profit nor loss is made
• Formula to calculate the break even point


  Break even point = Fixed costs / (Selling price - Variable costs per unit)
• Each subsequent unit sold past the break even point generates profit for a business
• Margin of safety


  The difference between actual output and the break even level of output
• Break even chart


  Shows the break even point, fixed costs, total costs, revenue over a range of output, and the margin of safety
• Fixed costs remain constant regardless of the level of output
• Break even analysis is less useful when businesses produce more than one product
• A key limitation of break even analysis is that it assumes all output is sold
• Budget


  A financial plan that a business sets for costs and revenue
• Budgeting requires different parts of a business to operate as part of a coordinated whole
• Budgets are usually set annually and then monitored on a monthly basis
• Historical figure budget


  Based on past data, such as sales and costs from previous years
• Zero based budgeting


  An approach where budgets are not allocated, requiring all spending to be justified
• Budget variance


  The difference between a budgeted figure and the actual figure achieved by the end of the budgetary period
• A favourable variance means actual figures are better than budgeted figures
• Variance analysis


  Identifies reasons for differences between actual and budgeted figures, aiding in decision-making and performance evaluation
• Formula to calculate the profit variance

  Profit variance = Actual profit - Budgeted profit
• Adverse variance


  When the actual profit figure achieved is worse than the budgeted profit figure