Assignment Title: Financial Forecasting for Business

Transcription

1 Context Assignment Title: Financial Forecasting for Business The aim of this unit is enable you to understand the financial aspects of running a business. You will do this through looking at the key concepts used by businesses to manage their money, and forecast their finances for the future. Task Overview Money is at the heart of business. It is likely to be the main reason why a business was created and for it continuing to trade. In this unit you will be introduced to the types of costs that different businesses will incur. This is followed by exploring how the sale of products and services generates revenue. You will then learn about break even analysis, a technique used to determine the point at which sales equal costs. You will learn about the concept of cash-flow forecasting, which estimates the timing and amounts of cash inflows and outflows over a specific period (usually one year). This is followed by exploring how cash flows can be managed more effectively. The knowledge and skills developed in this unit are essential for anyone running a small business venture or involved in the financial management of business organisations. Date of issue: Date of submission: Learning outcomes On completion of this unit, you should: 1. Know about costs, revenue and profit in a business organisation 2. Be able to prepare a break even analysis 3. Be able to create a cash-flow forecast Refer to the assignment task sheet and the criteria tick sheet to ensure that you meet the standards for pass, merit and distinction for Unit 1. There are THREE tasks to complete for this unit.

2 Assignment Task Sheet Task Activities Assessment criteria 1 Know about costs, revenue and profit in a business organisation Date task set: Deadline: For this task, you are to imagine that you are setting up your own business. For example, you may want to set up a fast food outlet, a hairdressing/beauty salon, a car repair shop, a café/restaurant etc. Create a report which includes the following: a) For your business idea, complete the table below to identify the start up, operating, variable and fixed costs: Start up costs Operating costs (expenses) Variable costs Fixed costs e.g. 2,000 e.g. raw 500 per month e.g. 1,500 per month b) Under your table, define what each type of cost is and identify the difference between start up and operating costs, variable and fixed costs. Use the examples in your table to help you explain the differences. c) For your business idea, identify the different types of revenue that it might generate. Consider whether your business will generate income through sales, leasing or interest. d) Using the case study below, calculate gross and net profit and then outline the differences between them: P1 P2 P3 Michelle has recently set up a café in Arnold. The business generates 3,500 per week in sales income and the cost of her food and drinks which are for sale is 1,050. Other expenses include staff wages, rent, heating etc which cost 750. Remember. Sales income Cost of sales = GROSS PROFIT Operating costs = NET PROFIT

3 e) Explain the importance of costs, revenue and profit for a business organisation such as Michelle s. Ensure you explain what costs, revenue and profit are and how they are linked together. How important is each? What could happen if Michelle does not control her costs, bring in enough revenue or make a profit? M1 2 Be able to prepare a break even analysis Date task set: Deadline: For this task, you must produce a break even analysis (on paper or in Excel) for an internet café based up an average customer spend of 5 per visit. Ensure any questions are answered on your paper or excel document as evidence. The costs are as follows: Fixed costs (rent etc.) Variable cost per visit (e.g. food, internet access) 2.50 Average spend per customer 5.00 You should set out your table as follows and calculate up to 250 customers: A B C D E F 1 Customers Fixed costs Variable costs Total costs Revenue Profit/loss etc a) Using your table, calculate break even using the data provided above to show the level at which income equals expenditure. Label this on your table as break even point. b) As a check, use the break even formula to check that your table is correct. P4 Sales level needed to break even = Fixed costs Selling price variable cost per visit c) Present your completed break even table as an annotated graph showing breakeven point. Ensure you include the following lines and labels on your graph: Y axis label Costs and revenue ( ) X axis label Number of customers Fixed costs line Variable costs (label the area on your graph) P5

4 Total costs line Sales revenue line Break even point Profit (shade the appropriate area on your graph) Loss (shade the appropriate area on your graph) d) Demonstrate the impact of changing cost and revenue data on the break even point for the internet café business. On your break even table used in part (a), change the fixed costs to 650 and the variable cost per visit to Take a copy of this new break even chart as evidence of the changes made. Describe what happens to the break even point based on these changes. Ensure you identify what the new break even point is. e) Evaluate the importance of break even for the effective management of business finance. What are the strengths and weaknesses of break even analysis? How does it help businesses? 3 Be able to create a cash-flow forecast M2 D1 part Date task set: Deadline: a) Prepare an annual cash flow forecast for Perfect Pizza, a Nottinghamshire pizza factory for the year of 2010 using the monthly data provided. The table below outlines the income and expenditure figures: P6 Month Sales Purchases Wages and salaries Other expenses January 65,000 26,500 17,500 15,500 February 70,000 45,500 18,000 20,500 March 72,500 50,000 18,250 19,000 April 85,000 34,500 18,500 18,500 May 63,000 27,500 19,000 14,000 June 52,000 23,580 18,750 14,450 July 64,000 32,100 19,250 17,000 August 66,000 29,000 18,750 15,500 September 48,000 41,760 16,500 13,550 October 72,000 34,750 18,500 12,650 November 84,000 25,890 19,000 16,000 December 76,000 40,000 18,750 13,350 Note that the business had a bank opening balance of 10,000.

5 Use the template below to set out your cash flow forecast either on paper or in Excel: Cash flow forecast for Perfect Pizza for the year of 2010 Income Total Income Expenses Total Expenses Net Cash flow Opening Balance Closing balance b) Analyse the implications of regular and irregular cash inflows and outflows for a business organisation. For example, how might a regular inflow/outflow of cash affect the Perfect Pizza cash flow forecast? Consider positive and negatives implications for the business. c) Evaluate the importance of cash-flow for the effective management of business finance. What are the strengths and weaknesses of cash flow forecasting? How does it help businesses? M3 D1 part Useful websites for Unit 3 A business education resource site The Times 100 business studies resource centre Tutor2U Resources and revision materials

6 Criteria Mark Sheet Pass Met Comment P1 identify the difference between start up and operating costs, variable and fixed costs P2 identify the different types of revenue P3 outline the differences between gross and net profit P4 calculate break even using given data to show the level at which income equals expenditure P5 present the break even as an annotated graph showing breakeven P6 prepare an annual cash flow forecast using monthly data. Merit M1 explain the importance of costs, revenue and profit for a business organisation M2 demonstrate the impact of changing cost and revenue data on the break even point of a selected business M3 analyse the implications of regular and irregular cash inflows and outflows for a business organisation. Distinction D1 evaluate the importance of cash-flow and break even for the effective management of business finance TASK 1B TASK 1C TASK 1D TASK 2A TASK 2C TASK 3A TASK 1E TASK 2D TASK 3E TASK 2E & 3C