2.2 Financial Planning

Introduction

• Focus on sales forecasting, sales revenue and costs, break-even, and budgets.
• Emphasis on understanding what numbers represent and key terms behind them.
• More theory-focused, less on calculations.

Sales Forecasting

• Definition: Predicting future sales based on various data.
• Methods:
  • Correlation: Relationship between two variables (e.g., temperature and ice cream sales).
  • Extrapolation: Predicting future data based on trends (e.g., increasing sales trends).
  • Moving Average: Smoothing out data fluctuations over time (e.g., sales spikes in seasonal products).
• Linked to Theme 3 (3.3.1) for quantitative sales forecasting.

Sales Revenue and Costs

• Revenue Calculation: Selling price x quantity sold.
• Costs:
  • Fixed Costs: Do not change with output (e.g., rent).
  • Variable Costs: Change with output (e.g., materials).
• Key Formula: Revenue - Total Cost = Profit.
• Price vs. Cost:
  • Price: What consumers pay.
  • Cost: What businesses pay.

Break-even Analysis

• Concept: Point where revenue equals total costs (no profit or loss).
• Calculations:
  • Contribution per Unit: Selling price - variable cost per unit.
  • Break-even Point: Fixed costs / contribution per unit.
• Graphical Representation: Shows relationship between costs, revenue, and output.
• Margin of Safety: Difference between actual sales and break-even output.

Budgets

• Definition: Financial targets (e.g., spending limits for departments).
• Types:
  • Revenue budgets.
  • Cost (or expenditure) budgets.
  • Profit budgets.
• Budgeting Methods:
  • Historical Budgets: Based on past data.
  • Zero-based Budgets: Created from scratch each period.

Variance Analysis

• Purpose: Compare actual performance against budgeted targets.
• Types of Variance:
  • Favorable Variance: Good performance (e.g., exceeding revenue targets).
  • Adverse Variance: Poor performance (e.g., exceeding cost limits).
• Calculations:
  • Revenue, expenditure, and profit variances.
• Not all cost savings are beneficial; quality and other factors must be considered.

Conclusion

• Overview of financial planning.
• Next focus: 2.3 finance topics, followed by operations and external environment in 2.4 and 2.5.