Please enable JavaScript.
Coggle requires JavaScript to display documents.
2.2 Financial Planning - Coggle Diagram
2.2 Financial Planning
2.2.1 Sales forecasting
Sales forecasting - A prediction of sales revenue based on the historical number of sales made and current market research and trends
-
-
-
2.2.2 Sales, revenue and costs
-
Types of costs
Fixed costs
These are costs which do not change or vary, regardless to changes in production or sales levels. For example, rent on a factory, staff wages, insurance interest on a bank loan
They must be paid regardless of the level of production, or amount of sales it achieves
Variable costs
These are costs which change in proportion to the amount of output produced, or the number of products sold. For example, raw materials, employees wage if linked to production or sales, energy costs
They're important to a business as they can be compared to any forecast to see how well the business is performing
-
2.2.3 Break-even
Break-even point - The point where a business does not make a profit, or a loss
Contribution
This is the difference between sales and variable costs of production: Contribution = selling price + variable costs per unit
-
-
Break-even point
-
It can show the minimum target for sales for survival and also informs what the business needs to sell products for to make a profit
-
-
Margin of safety
Margin of safety is the difference between the actual level of output/sales and the break-even output
It shows how much sales can fall before a business reaches it's BEP. If the margin of safety is high, then it can afford to be safe even if sales disappoint. On the other hand, if the margin of safety is low then a shortfall in sales can be very damaging
-
-
2.2.4 Budgets
Purpose of budgets
A budget is created to forecast and plan financially for the business and staff, over a given period of time. It is used to help a business achieve it's financial objectives and helps allocate within the business where money needs to be spent
A forecast of sales/revenue and expenditure is created for the period it covers. From this, the business can then weigh up the options in trade-offs and opportunity costs to get the best outcome
Types of budget
Historical budget
A historical budget is one that is created using a previous budgets period, or actual historical performance for the new budget period
It is relatively simple to operate, and more realistic due to being based on real facts and figures
It does assume activities and working practices work in the same way, and no incentive for developing new ideas or reducing costs
Zero-based budget
This is where revenue and sales are both set to zero, requiring the business to base the budget of current sales and costs
It encourages the business to be more forward thinking about expenditure and revenue, and looking to reduce costs while also improving
-
Variance analysis
Variances is the difference between the forecast figures to the actual revenue made which is then established. Favourable variances are ones which are greater than predicted, and adverse variances are ones that haven't been as successful as predicted
Variance analysis is used by businesses if they need to take action due to reasons like if the variance was adverse, if it will be a foreseeable variance, how large the variance is and if there will be long-term trends
Difficulties budgeting
It is a time-consuming process, especially with larger businesses
It can prioritise the short-term which may keep under budget, but the long term may exceed over budget
Budgets must be constantly changes as the circumstances within a business and externally are always changing