Business Finance & Budgeting

Business Finance & BudgetingChapter 65. Explain how a business uses forecasting techniques in their business operations.

Course Competency Chapter 6 Packet (Except #4)Plus-Mini case page 193-194Test Chapter 5&6

For Next TimeWhat is forecasting?Forecast

Why is it important?Forecasting

Forecast SalesTells us what we need to produceExpected Revenue & ExpensesExpected ProfitEstablished companies often use historical trends to predict future sales.

Step 1

Class ExampleForecasting SalesCost Drivers

What are they?

Forcasting CostsGroup ActivityIndustries/Cost:Hospitals/SurgeriesPizza Delivery/Vehicle fuelLawn Mower Manufacturers/product warrantiesRetailers/Store RentCollege and Universities/Repairs to student computersAccounting, Consulting and Law Firms/SalariesAirlines/Flight CostsWhat are the possible Cost Drivers?

Identify Cost Drivers Across IndustriesHospitals/SurgeriesStaffing requirements, procedure type, patient condition.Pizza Delivery/Vehicle fuelVehicle age and type, miles drivenLawn Mower Manufacturers/product warrantiesNumber of defects, number of partsRetailers/Store RentProperty size, property age, locationCollege and Universities/Repairs to student computersInstructional methods, computer usage, computer age

Possible Cost DriversAccounting, Consulting and Law Firms/SalariesExperience, education, certificationsAirlines/Flight CostsDistance, aircraft age, aircraft type, number of passengers

Possible Cost DriversHow do we know if the drivers really are drivers, and what effect do they really have?Understanding Revenue and Costs

Scatterplot:Data graphed across two dimensions

Shows the relationship between:results (Vertical or Y axis-dependent) Ex. $ values such as sales or total costsandrev (horizontal or X axis-independent) Ex: website hits or advertising expendituresForecasting TechniquesScatter Plot Method

Sales-YAdvertising -XNorthwest2000000120000Midwest2140000141000South1800000132000East140000091500Southwest150000092000Plot thisMeasures degree of relationship between variablesDoes advertising correlate to sales?Correlation worksheet

Correlation Analysis

Identifies cost behavior patternsIdentifies the best fitting line among a set of data pointsRegression line equation: y = a + bxY=total costs, a=fixed costs, b=variable cost/unit, and x=units sold

Total Costs = Fixed Costs + Variable CostsRegression Analysis:

Regression Analysis ActivityThe forecasting techniques discussed so far are all quantitative (numerically based)There are several qualitative factors that affect costs.Qualitative Cost ConsiderationsReliance on technology-intensive production increases fixed costs.Businesses cant cut Direct Labor to reduce costs.Strategic planning is importantTechnology ConsiderationsCopyright Houghton Mifflin Company. All rights reserved.6-21Environmental FactorsChanges in market forces (e.g., the economy, competition, and regulation) impact both the manner and extent to which managers rely on cost data. For example, if the government mandates an increase in the minimum wage, assumptions about employee labor costs based on historically based quantitative analyses will no longer be valid. Copyright Houghton Mifflin Company. All rights reserved.6-22Industry StructureManufacturers are different from MerchandisersCopyright Houghton Mifflin Company. All rights reserved.6-23Learning Curve and Cost BehaviorAs workers become more experienced, efficiency increases. Marginal cost of production becomes less and lessCopyright Houghton Mifflin Company. All rights reserved.6-24Business Strategy A firms strategy also affects cost. What are a firms goals. For example, a business may choose to dedicate time and resources to a particular product line or subset of customers. Copyright Houghton Mifflin Company. All rights reserved.6-25Cost ControllabilityRecognizing which costs are controllable allows managers to determine how much flexibility they have to adapt to changing business conditions.

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