2.2 financial planning

• Sales forecast


  Prediction of future sales
• Methods for sales forecasting

  1. Use past data

  2. Use market data

  3. Correlation between variables

  4. Extrapolation of trends

  5. Moving averages
• Correlation


  Relationship between two variables
• Extrapolation


  Basing predictions for the future on observed trends
• Moving average


  Smooths out fluctuations in data to identify underlying trends
• Revenue


  Selling price x Quantity sold
• Total cost


  Fixed costs + Variable costs
• Fixed costs


  Costs that don't change as output changes
• Variable costs


  Costs that change as output changes
• Profit


  Revenue - Total cost
• Contribution per unit


  Selling price - Variable cost per unit
• Calculating Breakeven


  1. Contribution per unit

  2. Fixed costs / Contribution per unit = Breakeven units
• Breakeven is the point where Revenue = Total cost (zero profit)
• Reaching Breakeven is a key goal for new businesses to ensure survival
• Contribution per unit


  Contributes towards paying off fixed costs
• Calculating break-even point


  Fixed costs / Contribution per unit = Break-even output
• Break-even calculation example


  • Fixed costs = £12,000, Contribution per unit = £12, Break-even output = 1,000 units
• Selling above break-even point


  Every additional unit sold generates profit
• Selling below break-even point


  Results in a loss
• Break-even chart


  • Shows fixed costs, variable costs, total costs, and revenue lines
  • Identifies the break-even point where revenue = total costs
• Margin of safety


  Difference between actual sales and break-even output, shows how many sales can be lost before making a loss
• Budget


  A financial target for a business
• Types of budgets


  • Revenue budgets
  • Cost/expenditure budgets
  • Profit budgets
• Historical budgets


  Use previous year's data to set budget for following year
• Zero-based budgets


  Create budgets from scratch, e.g. based on number of students
• Variance analysis


  Comparing actual performance to budgeted performance
• Favorable variance


  Actual is better than budgeted (e.g. revenue above target, costs below target)
• Adverse variance


  Actual is worse than budgeted (e.g. revenue below target, costs above target)