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What are the 4 purposes of sales forecasts?
HR plan
Marketing budget
Profit forecasts/budget
Production planning
Marketing budgets
A company may choose to boost sales of a ‘star’ or revive sales of a struggler
HR plan
Sales forecasts will be used to consider whether the business has the right amount of staff with the right skills
Profit forecasts/ budget
Sales forecasts help shape expectations of spending
Production planning
To ensure enough products/ raw materials are made, planning production levels will take place by working backwards from sales forecasts
Sales volume
The amount of a product/ service is sold
Sales revenue
The value of the units sold
fixed costs
costs that do not change as the level of output changes
Have to be paid whether output is 0 or 500
e.g rent, loan repayments
variable costs
Costs that change as the level of output changes
These increase as output increases and vice versa.
e.g raw material costs, wages of workers involved in the production
total costs
The sum of fixed costs and variable costs
Total variable costs (TVC)
Variable costs (VC) x quantity (Q)
Average total cost (ATC) (Cost per unit)
total cost (TC) x Quantity (Q)
Variable cost per unit (AVC)
Total variable costs (TVC)/ Quantity (Q)
contribution
selling price per unit - variable cost per unit
Break-even
It is where a products total costs is equal to its total revenue
Break even point = fixed costs/contribution
allows a business to identify how many items a business needs to produce and sell to cover all of its costs before making a profit
Margin of safety
Difference between the actual output level of a business and its breakeven level of output
Actual level of output - breakeven level of output
Limitations of break even analysis
Not good for businesses with more than one product
can be hard to amend when conditions change (Costs, price etc)
It assumes ALL output is sold
Budgets
A target for revenue or costs for a future time period
it is usually closely aligned with the business objective
Income budget
A target for the value of sales to be achieved
expenditure budget
Gives budget holders a limit under which they must keep department costs.
purpose of budgets
Expenditure budgets are set so that no department or individual spends more than the company expects
Helps motivate staff to hit different targets
Expenditure budgets alow spending power to be delegated to local managers who may understand the local conditions better
Two types of budgeting
Zero-based budgeting
Historical budgeting
Historical budgeting
It is set using last years budget as a guide and then making adjustments on known changes in the department
E.g if 10% more staff have been employed at a branch, their budgets would be increased by 10%
Zero-based budgeting
Involves setting a budget to zero each year and then expects each budget holder to justify a budget figure that they can work to for the coming year
Can be very time consuming but can prevent wastage that creeps up year after year with historical budgeting
Variance analysis
Variance analysis involves looking back to calculate the difference between the budget figure and the actual figure that occurred.
Variances can be adverse or favourable
Adverse variance
The actual figure was worse than the budgeted figure
E.g if your actual income was lower than your income budget or if your actual expenditure was higher than your expenditure budget.(results in lower profit)
Favourable variance
The actual figure was better for the business than the budget figure
e.g if actual income was higher than income budget or if actual expenditure was lower than the expenditure budget (results in higher profit)
why can budget variances occur?
The original budget was unrealistic
The target wasnt met due to factors beyond the budget holders control
The target wasnt met due to factors within the budget holdera control.
Difficulties of budgeting
Setting budgets ( Hard to set realistic targets, and avoid budgets creeping upwards)
imposing/ agreeing on budgets (If budget holder has no say it can be demotivating)
Failing to understand the cause of variance (Blaming a budget holder for something out of their control is demotivating)
