Data, Market Analysis, Sales forecasting and finanial/non-financial performance

Define data

Data is information that has been collated in a way that allows it to be used to inform decision making

Define Index Numbers

Index Numbers allow for comparisons to be made over time. An index starts on a given number, usually 100, which is the base number.

Define market analysis

Market analysis is concerned with collecting and interpreting data about customers and the market so that businesses adopt a relevant marketing strategy

Define PED and give its equation

PED measures how sensitive demand is to a change in price

Price elasticity of demand - measures how sensitive demand is to a change in price

(Percentage change in quantity demanded) / (Percentage change in price)

*Always shown as a negative

Define YED and give its equation

YED measures how sensitive demand is to a change in consumer income

YED = (Percentage change in Quantity Demanded) / (Percentage Change in Income)

What is a price elastic product and what is its PED Value

• PED Value >1

• Change in price will cause more than a proportional change in quantity demanded

• Demand is sensitive to a change in price

• E.g. goods w/ many substitutes, luxury goods

What is a price inelastic product and what is its PED Value

• PED Value <1

• Change in price causes less than proportional change in quantity demanded

• Demand is not sensitive to a change in price

• E.g. Necessities, Addictive goods, strong brands

What is a normal good and what is its YED Value

• YED value less than 1 and positive

• As income increases, demand increases

• Inelastic

What is a luxury good and what is its YED Value

• YED value is greater than 1

• As income increases, the demand for luxury goods will grow faster than the increase in income

• Elastic

What is an inferior good and what is its YED Value

• negative income elasticity

• YED value is less than 0

• If income rises, demand will fall

How will changes in price effect sales revenue for elastic and inelastic products

• For elastic products:

Increasing prices will lead to a decrease in sales revenue. Conversely, lowering price when demand is price elastic will lead to a rise in sales revenue

• For inelastic products:

A rise in price will lead to an increase in sales revenue. A fall in price will lead to a fall in sales revenue

How will changes in price effect profit for elastic and inelastic products

• For price inelastic products, a rise in price will lead to lower sales but increased sales revenue, but lower sales means lower variable costs. Therefore profits will increase, not just from increases sales revenue but also from lower costs

• If price elastic products, an increase in sales revenue can be achieved by lowering prices and therefore increasing sales. But higher sales means higher costs. In this situation, higher profits will occur if the increase in sales revenue is greater than the increase in costs

Why would it be useful for a business to know about PED/YED (and why not?)

• Pricing strategies

• Revenue/Profit optimisation - can predict how changes in price will impact revenue

• Forecasting sales for when prices rise/fall

• Strategic planning for economy changes

But…

• Only estimates (data often collected through consumer intention surveys)

• Assumes only one factor affects demand - other external factors to consider

What is sales forecasting

Sales forecasting is the process of predicting future demand by anticipating what consumers are likely to do in a given set of circumstances

What are quantitative forecasting

Quantitative forecasting methods are used when there is historical data available

Can include:

• Time series analysis

• Extrapolation and trend analysis

• Correlation analysis

• Use of market Research data

What is qualitative forecasting

Qualitative forecasting methods are used when historical data is not available.

Can include:

• Delphi technique

• Brainstorming

• Expert opinion

• Intuition

What are the three main external factors that could make sales forecast inaccurate

• Economy

• Consumer trends

• Competition actions

What is time-series analysis

Time-series analysis uses evidence from past sales records to predict future sales patterns

Uses moving averages to smooth out fluctuations in data to identify trend

What is extrapolation

Extrapolation is determining future trends through the extension of past trends using a line of best fit

What is correlation analysis

A measurement of the strength of the relationship between two variables

What 3 types of market research data can be used for sales forecasting

• Surveys of consumer intentions

• Direct sales information

• Test marketing

What is the Delphi method

1. Select a panel of experts – e.g. industry specialists, senior managers, consultants.

2. First round of questionnaires – each expert gives their independent forecasts or views on future sales.

3. Results are summarised – a facilitator collects and summarises the responses, then shares the summary back with the group (without revealing individual names).

4. Further rounds – experts review the summary and may adjust their forecasts, aiming for a more refined, reasoned consensus.

5. Consensus forecast – after several rounds, the group tends to converge on a forecast that represents the collective judgment.

What are the advantages and disadvantages of using the Delphi Method as a way of sales forecasting

Advantages

• Uses the knowledge of experts, so can consider qualitative factors (e.g. market trends, competitor moves, new technology).

• Reduces bias compared to relying on one person’s opinion.

• Useful when there is little past data (e.g. for a new product).

Disadvantages

• Can be time-consuming and expensive (experts’ time and multiple rounds needed).

• Still subjective, as it depends on opinions.

• Quality of forecast depends on the quality of experts chosen.

What is a budget

A budget is a financial plan for the future, It includes expected levels of expenditure and revenues of a business

What is a balance sheet and what are its components

A balance sheet is a statement of a business’s assets and liabilities at a specific point in time.

The components of a balance sheet are as follows:

• Fixed (or non-current) assets - Expected to be retained within the business for more than a year, therefore having a long term role in the business and are used to produce the output of the business

• Current Assets - Expected to change value often due to the normal course of business trading

• Current Liabilities - Debts that are normally paid within a year

• Long term (or non-current) liabilities - repaid over more than a year

• Net Assets - calculated by adding both current and non-current assets and deducting all liabilities

• Net Current Assets - Difference between current assets and current liabilities

• Shareholders funds - money invested into business by the owners, and also includes retained profit and reserves

What is working capital and how is it calculated

Working capital is the money required for the day-to-day operations of the business. Working capital is a good measure of a firms short term financial health, providing an indication of whether a business hold enough current assets to cover their current liabilities.

Working capital shows the financial strength of a business in the short term, the higher the level of working capital, the more able a business is to keep up with demands from creditors for payment and to cover day to day expense of running the business.

Working Capital = Current Assets - Current Liabilities

What is capital employed and how is it calculated (2)

Capital employed is the total amount of capital used for the acquisition of profits by a firm. Provides an insight into how well a company is investing its money to generate profit

Capital employed = Non-current liabilities + Owners Equity (Shareholders funds)

OR

Total assets - current liabilities  

What is return on capital employed

Return on capital employed shows the profitability of the investment by calculating its percentage return. This measures the efficiency with which the business generates profits from the capital invested in it. Over 15% is a desirable figure

Can be improved by reducing capital employed and raising profit.

ROCE = (Net profit before tax/ Shareholder’s funds + non-current liabilities) x 100

What is liquidity

Refers to how quickly assets can be converted into cash

How is the current ratio calculated

= Current assets / current liabilities

Always shown to 1

Should be between 1.5:1 - 2:1

Below 1.5:1 is due to over borrowing

Above 2:1 is bot ideal as money is just sitting around and not used productively

What is acid ratio

(Current assets - stock) / Current liabilities

Ideal = 1:1

Less - not enough current assets to cover liabilities

What is the gearing ratio

Gearing ratio = (Non current liabilities / Capital employed) x 100

• >50% = highly geared - majority of business funded by debt

• <40% = low geared - low level borrowing

What does it mean to window dress accounts

Window dressing involves the organisation of financial information in such a way that it presents the business in the best possible light to investors

What are the main methods of window dressing accounts

• Exceptional items - asset sales might be presented as part of the firm’s normal sales revenue, disguising the real reason behind a rise in profits

• Brand Valuation - Intangible assets like brands could be revalued much higher by a firm. Or depreciate intangible assets to reduce tax and improve ROCE

• Presentation - Distorting chart sales and being selective about which data is used

• Rush to sell stock at end of financial year

• Delay payments for expenses

• Keep ‘bad debtors’ even though there is little to no chance of them paying back - increases total assets and makes the business appear more liquid

Why would a business want to window dress its accounts 

• Strengthen share price to attract investors

• Manager praise and recognition 

• Lower tax by artificially reducing profits

• Improve credit score by raising profits

• Minimise risk of takeover by raising company valuation

What is depreciation

Depreciation involves recognising that fixed asset are not worth the same value throughout their useful life due to becoming damaged, outdated or obsolete.

Cost of the asset is spread out over its lifetime, providing a more realistic statement of a firms financial position and prevents assets from being overvalued

Define historic costs 

How much a fixed asset is originally purchased for

Define Net book value

How much a fixed asset is worth after depreciation is subtracted

Define useful life of an asset

An estimate of how long a fixed asset is going to be in use for

Define residual value

The worth of a fixed asset at the end of its useful life

How is annual depreciation calculated

Annual depreciation = (Historic Cost Value - Residual Value) / Useful life of asset

How can Market Share be a non-financial performance measure

• Market Share = (Sales of a business / Total market sales) x 100

• Market share is the proportion of total business sales a business has in the market

• Increasing market share is a common long term aim of businesses

• Higher market share can help improve sales and brand loyalty as well as economies of scale

How can Sales Targets be a non-financial performance measure

• Setting sales targets for the future might also involve spending money in the short term in order to generate sales revenue, thus reducing profitability. This may involve the use of loss leader products which results in increased future sales

• Targeting increased use of products by existing customers may be more profitable than trying to gain new customers

• However, unrealistic sales targets will put pressure on employees (Vrooms expectancy theory)

• Depends upon staff skill/training

How can productivity be a non-financial performance measure

• Output in relation to the inputs used

• For a given time period this could be; output per worker; output per machine; output per site

• Productivity has a significant affect on the costs of producing a unit

• Some businesses may ignore short term profits in order to improve productivity

• Increasing productivity reduces unit costs allowing for a firm to either be more competitive on price OR to increase profit margin - this will depend upon PED of products or type of business

How can Quality be a non-financial performance measure

• Targets set for the number of defects produced by a production process or the number of faulty good returns by customers

• All firms want good quality products as poor quality indicates lack efficiency and it increases costs

How can environmental impact be a non-financial performance measure

• Helps give a business a better reputation

• Depends on customer base

• Can be expensive for a businesses to remain environmentally sustainable

How can customer satisfaction surveys be a non-financial performance measure

• Measures the degree to which customer expectations are met or exceeded

• Improves quality and therefore customer loyalty in the long term

How can employee attitude surveys be a non-financial performance measure

• Identify existing issues

• Indicates how motivation can be improved

• Judge reactions to proposed change

• Access effectiveness of policies

• Can be used alongside information of labour turnover

What is a mission statement

A mission statement is a written statement that states the purpose of the organisation. It shows what a business wants to achieve at a current time

What factors would impact a businesses mission statement

• Personal beliefs, values and objectives of leaders/founders

• Business ownership

• Power and values of stakeholders

• Nature of the industry

• Degree of competition

What are the benefits of having a mission statement

• Clear vision for mangers and employees

• Commit resources correctly

• Helps to set objectives

What is a vision statement

A vision statement provides a clear view of where the business wants to be and what it wants to achieve in the future. This provides a sense of direction for the business and informs core values and strategic decision making. The vision statement can be incorporated into marketing to influence customer perception.

What are the benefits of a vision statement

• Clear vision for mangers and employees

• Commit resources correctly

• Helps to set objectives

• Can be used in marketing

What are aims

Business aims are what the business wants to achieve in the future. They tend to be quite generic and broad. They set out the goals of the business.

What are objectives

Business objectives are more specific and measurable targets the business will set to achieve it aims.

What is strategy

Strategy is the way a business operates in order to achieve its aims and objectives.

What is corporate strategy

Corporate strategy is the long term plans of a business; details how objectives will be met though decisions and activities relating to all aspects of the business.

What is strategic direction

Strategic direction is a course of action that ultimately leads to the achievement of the stated goals of the corporate strategy

What is divisional strategy

This includes plans implemented by individual units, e.g. functional, geographical or product divisions. This is informed by the corporate strategy which is communicated to divisional managers

What is functional strategy

The plans to be implemented by each of the areas e.g. marketing, finance, operations and HR. The decisions at this level are guided and limited by higher level corporate and divisional strategy

What is a corporate plan

A detailed, medium to long term plans outlining the actions a business will take to achieve corporate objectives. This gives a clear sense of direction and will allow for progress the be reviewed. Must be frequently monitored and reviewed

What are tactical decisions

• Tend to be short term, responding to opportunities and threats

• Often influenced by functional objectives

• Commits less resources

• Involves decisions around

- Marketing mix

- Financial + Non-financial rewards

- Inventory management

- Location decision

- Day to day customer service decisions