2.2 : Financial Planning

Flashcards covering key vocabulary and formulas for sales forecasting, revenue, costs, break-even analysis, and budgeting based on the Edexcel A Level Business curriculum.

Sales Forecasts

Predictions of future revenues based on past sales figures, commonly focusing on sales volume, value, market size, and promotional or cyclical factors.

Consumer Trends

Factors influencing sales forecasts including seasonal variations, fashion (often led by celebrities like Megan Fox), and long-term changes in behavior like environmental consciousness.

Economic Variables

External factors such as economic growth, inflation, unemployment, interest rates, and exchange rates that affect the reliability of sales forecasts.

Sales Volume

The number of units sold by a business, such as the number of Harry Styles album download purchases.

Sales Revenue

The value of the units sold by a business, calculated using the formula: $\text{Sales revenue} = \text{Selling price} \times \text{Number of units sold}$.

Fixed Costs (FC)

Costs that do not change as the level of output changes, such as building rent, management salaries, insurance, and bank loan repayments.

Variable Costs (VC)

Costs that vary directly with output, increasing as output increases and vice versa, such as raw material costs and wages of production workers.

Total Costs (TC)

The sum of fixed costs and total variable costs, calculated as: $\text{TC} = \text{Total FC} + \text{Total VC}$.

Total Variable Costs Formula

The calculation used to find the sum of all variable expenses: $\text{Total VC} = \text{VC per unit} \times \text{quantity}$.

Average Total Costs (AC)

Also known as unit cost, calculated by dividing total costs by the quantity produced: $\text{Average TC} = \text{TC} \times \frac{1}{\text{quantity}}$.

Economies of Scale

Efficiencies generated as a firm grows and increases its scale of output, which lower the average total costs of production.

Diseconomies of Scale

The point at which a firm continues increasing its scale of output and the average costs start to increase.

Contribution

The amount a product's selling price provides towards paying off fixed costs, calculated as: $\text{Contribution} = \text{Selling price per unit} - \text{Variable cost per unit}$.

Break-even Point

The level of output where total revenue earned for a product is exactly equal to its total costs, resulting in neither a profit nor a loss.

Break-even Point Formula

The formula used to determine the units needed to cover all costs: $\text{Break-even point} = \frac{\text{Fixed costs}}{\text{Contribution}}$, always rounding up to the nearest whole number.

Margin of Safety

The difference between the actual level of output of a business and its break-even level of output.

Margin of Safety Formula

Calculated as: $\text{Margin of safety} = \text{Actual level of output} - \text{Break-even level of output}$.

Budget

A financial plan that a business or department sets for costs and revenue, usually closely aligned with business objectives.

Historical Figure Budgets

Budgets based on data from previous years, such as sales and costs, while accounting for factors like inflation and exchange rate variations.

Zero-based Budgeting

A budgeting approach where no budgets are pre-allocated and every item of spending must be justified, helping to eliminate unnecessary costs.

Budget Variance

The difference between the figure budgeted and the actual figure achieved by the end of the budgetary period.

Variance Analysis

The process of seeking to determine the reasons for the differences between actual financial figures and budgeted figures.

Favourable Variance

Occurs when the actual figure achieved is better than the budgeted figure (e.g., higher revenue or lower costs than expected).

Adverse Variance

Occurs when the actual figure achieved is worse than the budgeted figure (e.g., lower revenue or higher costs than expected).

Break-even Chart

A visual representation showing fixed costs, total costs, and revenue over a range of output to identify the break-even point and margin of safety.