A-Level Business - Theme 2.2

Sales Forecast

Estimate of future sales based on previous sale figures, market surveys/trends or managerial estimates

Uses of Sales Forecast (3)

Predict… , Note… , Combine…

• To intellectually predict future sales

• To note trends, peaks & troughs

• To combine w/ current & upcoming trends to make decisions for future stages

Factors Affecting Sales Forecasts (3)

C, A, E

• Consumer Trends

• Actions of Competition

• Economic variables

Consumer Trends

The habits or behaviours of consumers that determine the goods and services they buy (E.g: music, fashion, gaming consoles, phones etc.)

Actions of Competition affecting SF examples (5)

Competitors…

New…

If a business…

Changes in…

Better ability to…

• Competitors entering/exiting the market

• New product launch

• If a business fails

• Changes in price and promotion

• Better ability to respond to consumer trends

Economic variables for SF (4)

I, E, C, S

• Interest Rates ( ↓ rates = more money to spend = ↑ sales )

• Employment ( ↓ employment = no SOI = cut on non-essentials = ↓ sales )

• Consumer Confidence ( ↓ confidence = worried to spend & cut back = ↓ sales )

• Stages in economic cycle ( ↑ economy = confidence ↑ & ↑ employment as GDP ↑ = ↑ sales)

Advantages of Sales Forecasts (5)

Helps… , Form… , Inform… , Apply… , Iden…

• Help make key decisions (purchase raw materials, promotions, staffing)

• Formulate smart targets for people & teams

• Can inform shareholders (Ltd & Plc)

• Helps apply for finance

• Identify gaps that will impact other things

Disadvantages/difficulties of Sales Forecasts (4)

Future is…

Changes in…

Time frame can be…

People… - o/u

• The future is unpredictable & uncertain

• Changes in external factors - out of control

• Time frame can be unrealistic or can change

• People lie - sales may be over/under estimates

Revenue

Total income earned from sales

Revenue Formula

Sales Revenue = Selling Price x Quantity Sold

Sales Volume

The quantity of goods & services sold by a business

Costs

Expenses of a business incurred in production of a good/service

Price

The amount payable by the consumer for the good/service

Fixed Costs

Costs that do not change as output changes, always have to be paid regardless of the number of customers

Examples of Fixed Costs (4)

R, H, S, I

• Rent

• Heating

• Salaries

• Insurance

Variable Costs

Costs that change as output changes, have to be paid for each customer

Examples of Variable Costs (4)

W, R, P, D

• Wages per unit

• Raw materials

• Packaging

• Delivery costs

Total Variable Costs Formula

Total VC = Variable cost per unit x Number of units sold

Semi-Variable Costs

Expenses a business has to pay which may change as output changes, hard to place as they could be linked with output

Examples of Semi-variable Costs (4)

D, E, M, E

• Delivery Costs

• Electricity

• Machine maintenance costs

• Energy (water for car washes)

Profit Formula

Profit = Total Revenue - Total Costs

How to Increase Profits (4)

I, I, F, L

• Increase selling prices

• Increase advertising

• Find a cheaper supplier

• Lower rent / insurance

Break Even

When the total revenue is equal to the total costs, measured in units - neither a profit or loss

Break Even formula

Break-Even = fixed costs / Contribution

Contribution

The difference between selling price of a product and the variable costs it takes to produce it

Contribution Formula

Contribution = selling price per unit - variable cost per unit

Margin of Safety

The difference between the actual level of sales and break-even point

Margin of Safety Formula

MoS = actual output - break even point

Advantages of Break Even (5)

E, Q, C, C, M

• Easy to do

• Quick - can take immediate action if problems seen ( ↑ contribution per unit)

• Can see effects of variations in sales, profits & costs

• Can persuade banks to lend money

• Make decisions on whether new products should be launched

Disadvantages of Break Even (5)

A, U, B, A, T

• Assumes VC will rise in a steady rate

• Used for a single product only

• Based on accurate data -> if inaccurate, all predictions are wrong

• Assumes business will sell all products

• Tells you how many you need to sell, not how much you'll actually sell

Budget

A financial plan for the future, forecasting future earnings and spendings

Income Budgets

Forecasts the amount of money that will come into the company as revenue

Expenditure Budgets

Predicts what the business' total costs will be for the year

Profit Budgets

The difference between the income and expenditure budgets to calculate the expected profit or loss for that year

Profit Budget Formula

Profit budget = Income budget − Expenditure budget

Purpose of Budgets (4)

P, F, C, M

• Planning

• Forecasting

• Communication

• Motivation

Purpose of Budgets -> Planning (2)

• Helps plan any expenses in the year

• Identify where a business with fun into financial problems

Purpose of Budgets -> Forecasting (2)

• Sales forecasting based on sales history & how effective they expect their future trading to be

• Can prepare projected profits for the next year

Purpose of Budgets -> Communication (2)

• Owners can communicate objectives of the business in a financial plan

• Requires departments to report back on progress, monitoring income spendings

Purpose of Budgets -> Motivation (2)

• Can motivate staff to be more careful with finances

• Benefits/perks can incentivise the workers into keeping their costs in line with their budgeted amounts

Other uses of Budgets (4)

R, M, I, P

• Can raise/obtain finance from banks

• Manage income/expenditure

• Improves efficiency

• Prioritise different areas of the business

Types of Budgets (2)

• Historical Budgeting

• Zero-Based Budgeting

Historical Budgeting

Using last year's figures as the basis for the next year's budget (extrapolation)

Advantages of Historical Budgeting (4)

S, B, H, C

• Simple & Quick

• Based on real figures

• Helps with consistency

• Cost-effective

Disadvantages of Historical Budgeting (3)

I, D, N

• Ignores changes in market conditions

• Discourages innovation

• Not suitable for dynamic industries (keeps changing)

Zero-Based Budgeting

Where businesses begin with a budget of zero and must justify every expense/activity

Advantages of Zero-Based Budgeting (4)

Helps…, Helps…, O, P

• Helps in efficient allocation of department-wise resources

• Helps in cost reduction
  Overcomes weakness of incremental budgeting

• Prevents over/under budgeting

Disadvantages of Zero-Based Budgeting (4)

E, T, C, R

• Expensive

• Time-consuming

• Complicated to execute

• Requires training & extra staff

Variance

The difference between actual figures and budgeted figures

Favourable Variance

When costs are lower than expected or revenue is higher than expected

Adverse Variance

When costs are higher than expected or revenue is lower than expected

Variance Formula

Variance = Actual figure - Budgeted figure

Variance in Profit Formula

Variance in Profit = Variance in Revenue - Variance in Costs

External Factors affecting Variance (3)

C, C, C

• Competitor behaviour

• Changes in economy

• Costs of raw materials

Internal Factors affecting Variance (4)

• Improving Efficiency

• Overestimate the amount of money it can save

• Underestimate the cost of making a change

• Changing selling prices

Variance Analysis

Calculating the difference between the budgeting figure and actual figure, measures how accurate the estimates on a budget are