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Financial Management: Module 6 Budgeting and Forecasting Produced in conjunction with

Financial Management: Module 6 Budgeting and Forecasting Produced in conjunction with The African Entrepreneur Collective and Opportunity International www.oppteachers.org. Learning Objectives. By the end of this section you will be able to:

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Financial Management: Module 6 Budgeting and Forecasting Produced in conjunction with

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  1. Financial Management: Module 6 Budgeting and Forecasting Produced in conjunction with The African Entrepreneur Collectiveand Opportunity International www.oppteachers.org

  2. Learning Objectives By the end of this section you will be able to: • Develop forecasts of your sales, profit and loss, and cash flow • Interpret these forecasts to understand what they mean for your business

  3. Recap: Module 5 • What is Cash Flow • Cash is NOT Profit! • Cash Flow management: • Debtors • Creditors • Inventory

  4. Recap question: Which of the following is desired when managing cash flows? • Your cash outflows are greater than your cash inflows • Your cash outflows equal your cash inflows • Your cash inflows are greater than your cash outflows

  5. Why do you need a forecast? • Accurately forecasting your sales and building a sales plan can help you to avoid unforeseen cash flow problems and manage your production, staff and financing needs more effectively. • A sales forecast is an essential tool for managing a business of any size. It is a month-by-month forecast of the level of sales you expect to achieve. Most businesses draw up a sales forecast once a year. • A cash flow forecast can be created from the sales forecast and will help you manage your cash flow more effectively.

  6. Sales Forecasting • The key to business plans • Helps to identify what sales you needto make your business successful • Three key factors: • Assumptions • Units of sales • Price per unit

  7. Assumptions: Examples • You will implement a new marketing strategy that will increase your number of potential customers by 25% • You will invest in a new school building, doubling the number of students you will be able to accept next year • You will reduce your sales force from 5 people to 3 people halfway through the year • You will raise prices by 10%, which will reduce the volume of products sold by 5% but result in a 4% increase in overall revenue. • You will introduce new products with the potential to increase sales rapidly • You are moving to a better location, which will lead to 30% more customers buying next year.

  8. Units of sales • Unit = product/service for 1 customer e.g., 1 car, 1 school term, 1 hour of accountant’s time • How many units will you sell per week/per month? • Can you use past information? • If a new product, what do your competitors sell?

  9. Factors that affect sales • Seasons • Holidays • Weather • Politics • Competition • External Labour • Fashions and Styles • Population Changes • Consumer Earnings • Special Events • Product Changes • Sales Motivation Plans • Price Changes • Shortages in Working Capital

  10. Practice question 1 If you own a clothing retail store, which of the following could affect your sales? • Weather • New competition • Fashions and styles • Politics • All of the above

  11. Sales forecast for a hotel

  12. Cost Budgeting • Think about the main costs of your business, and understand whether they are: • Direct: will depend on sales made • E.g., Cost of goods sold, raw materials • Indirect: these are fixed costs • E.g., salaries, rent, electricity • Don’t forget about tax!

  13. Profit & loss forecast for a hotel

  14. Cash Flow Forecasting • Cash flow forecasting enables you to plan for: • How much cash your business will need to stay in business • When it will be needed • Applying for financing if there is going to be a shortfall • Managing excess funds A cash flow forecast will assist you to make sound decisions about your cash flow management, such as your credit policies and whether you need to apply for financing.

  15. Elements Of A Cash Flow Forecast • Receipts • Payments • Excess of receipts over payments • Opening bank balance • Closing bank balance

  16. Cash Flow Forecast

  17. Practice question 2: Which is the following is required to create a sales forecast? (pick 3!) A) Cash received B) Price per unit C) Units of sales D) Direct costs E) Assumptions

  18. Practice question 3: What is the difference between a cash flow forecast and a profit forecast?

  19. End of Financial Management: Module 6 Budgeting and Forecasting To continue your learning experience, visitwww.oppteachers.org

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