3.5.2 Flashcards
analysing financial performance (35 cards)
what is a budget?
a forward financial plan over a period of time
what is the budget used for?
used to measure expected levels of revenue and expenditure
why are budgets monitored?
in order to check for any differences of revenue or expenditure
what is a difference in revenue or expenditure called?
variance
how to calculate variance?
actual figure - budgeted figure
whose job is it to monitor any differences in the revenue or expenditure?
budget holder
what can budget variances be?
either positive (favorable) or negative (adverse)
what does favorable variance mean?
- revenue is higher than expected
- expenditure is lower than expected
what are the causes of favorable variance?
- sales growth
- cheaper import costs
- lower costs
what decisions should be made if the variance is favorable?
- establish more challenging targets
- try to replicate reasons for higher productivity
- increase production to meet demand
what does adverse variance mean?
- revenue is lower than expected
- expenditure is higher than expected
what are the causes of adverse variance?
- new competition
- higher taxes
- changes in interest rates -> adds to a firm’s debt burden on loans
what decisions should be made if variance is adverse?
- cut prices -> increases demand but depends on elasticity of product
- cut costs -> reduces wages, find cheaper suppliers -> results in unhappy staff and quality concerns
- find new markets -> increases sales -> risks failure, cost of research
what are the benefits of budgeting?
- enables clear targets to be established ad evaluated
- helps tighten financial control over a firm’s costs and revenue
- targets can motivate budget holders and their teams
- improved management control as managers know what is being spent
- communication levels strengthened
what are the drawbacks of budgeting?
- inaccurate data
- inflexibility
- time consuming to complete and collect data
- demotivates staff as they are excluded from the process
- limits opportunities
why is cash important?
- essential for a business to survive
- a business has to pay out money for the costs of producing an order or for assets before they get paid for that order
- the delay is called the cash flow cycle -> the larger the gap between money flowing in and out, the bigger potential for business failure
what is the cash flow cycle?
- inventory ordered
- production process
- inventory is stored
- goods are sold
- customer payment
what influences the cash flow cycle?
- type of good -> the more perishable a good the shorter the delay in payment
- credit term
- manufacturing system
what are payables?
the amount a company owes to its suppliers or creditors for goods and services received but not yet paid for
- recorded as liabilities
what are receivables?
the money a business is owed by their customers
what can cash be measured in terms of?
the amount that flows into a business in the form of revenue against the amount that flows out in the form of expenses
what happens when more cash flows in then out?
there is a cash flow surplus
what happens when more cash flows out then in?
there is a cash flow deficit
what is the cash flow forecast?
a projection of the future cash inflows and outflows from a business over a period of time (usually a year)
