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Business A Level > 3.5.2 Analysing Financial Performance > Flashcards

3.5.2 Analysing Financial Performance Flashcards

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1
Q

4 what is a budget

A

an agreed plan establishing the planned income, spend and profit for a business over a period of time

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2
Q

4 what is budgeting

A

the process involved in setting a budget

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3
Q

4 why should you have a budget

A

provide a plan of future activity
ensure finances are available to fund activity
prevent overspending and control costs
set targets to be achieved
help employees stay focused on achieving companies objectives

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4
Q

4 why are budgets set

A

set over a specific time period to monitor performance of set targets of income, expenditure, profit, budget, capital

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5
Q

4 how do you construct a budget?

A
  1. set objectives
  2. market research
  3. research costs
  4. sales income budget
  5. expenditure budget
  6. profit budget
  7. divisional budgets
  8. summarise
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6
Q

4 what is setting objectives

A

what are the budgets trying to achieve

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7
Q

4 what is market research

A

discover probable level of sales volume and market price

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8
Q

4 what are research costs

A

based on sales volumes expected

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9
Q

4 what is sales income budget

A

gives an estimate of how much to produce

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10
Q

4 what is expenditure budget

A

what costs will be incurred trying to achieve sales targets

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11
Q

4 what is profit budget

A

combine income and expenditure budget to give overall profit

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12
Q

4 what is divisional budgets

A

also know as departmental budgets
the overall budget broken down into products and departments

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13
Q

4 what is summarise

A

the detailed budgets feed up in to the master budget

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14
Q

4 what is the problem with setting budgets

A

4 reliant on accurate forecasts information
lack of effective research
changes in consumer tastes- popularity
unforeseen changes to cost of raw materials
changes in interest rates, inflation
rapid changes in prices caused by inflation

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15
Q

4 how are inaccurate forecasts unhelpful

A

will not give any potential lenders confidence in an entrepreneurs ability to set up and run a business

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16
Q

4 why are entrepreneurs not the best at budgeting

A

not have much experience and may be inaccurate, no historical data so hard to start the forecast anyway

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17
Q

4 why are impossible targets unhelpful

A

too high and unrealistic can demotivate staff as they regard impossible targets to achieve so give up

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18
Q

4 why are small budgets unhelpful

A

be challenging if too low and will not move a business towards goals effectively

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19
Q

4 why must you monitor budgets continuously

A

any problems can be flagged early on and appropriate action taken

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20
Q

4 how to do you set a budget with historical data

A

uses past data
able to adapt for planned forecasts
can be calculated quickly and easily
encourage reliance by departments to assume a certain level of budget

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21
Q

4 how do you set a budget with zero data

A

new businesses have no historical data
used by firms who make no assumptions so every spend is justified
more time needed to construct it

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22
Q

4 what are the difficulties in setting a budget, using sales forecasting:

A

harder when market experiences changes- new tech
start up firms find it hard to estimate likely revenue and sales
competitor actions are difficult to predict

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23
Q

4 what are the difficulties in setting a budget, using costs:

A

always likely to be unexpected costs
will vary depending on sales budgets
changes in external environment will impact costs, like taxes and exchanges rates

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24
Q

4 what are the drawbacks of using budgets

A

conflict may arise between departments as they are competing for a larger slice of funding available
short term budget cuts to meet strict targets might lead to long term problems for the business if sales fall as a result
ambitious targets may be unrealistic and lead to demotivation
staff many have no input in budget and can lead to demotivation

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25
4 what is variance analysis
the process where sales costs are compared with the budgets
26
5 what formulas do you need for a cash flow forecast?
net cash flow closing balance opening balance
27
5 what does a business estimate
how much it will sell costs to make fixed costs
28
5 how do business estimate costs
cash flow forecasts
29
5 what is a cash flow forecast
predict when cash is expected to come into and leave a business over a period of time
30
5 what are cash inflows
cash from the individual loans from the bank cash from sales
31
5 what are cash outflows
wages and training telephone, gas, electric bills etc equipment and stock advertising interest on loans maintenance and repairs
32
5 what is the difference between cash inflows and cash outflows?
net cash flow
33
5 what is positive net cash flow
Inflows are greater than out flows
34
5 what is negative net cash flow
Inflows are not enough to cover out flows​
35
5 what is closing balance
The amount of money in a business at the end of a month (net cash flow + opening balance)
36
5 what is opening balance?
The amount of money in a business at the start of a month. This is always the previous month’s closing balance.
37
5 what are some cash flow objectives?
Maintaining a minimum closing monthly cash balance​ Reducing the bank overdraft by a certain sum by the end of the year​ Creating a more even spread of sales revenue​ Spreading costs more evenly​ Achieving a certain level of liquid, non-cash items.​ Raising certain levels of cash at a particular point in time.​ Setting contingency fund levels​
38
5 example of Maintaining a minimum closing monthly cash balance​
A minimum cash balance of £10,000 would be a sensible objective for a small newsagent
39
5 example of Reducing the bank overdraft by a certain sum by the end of the year
A new start-up is likely to rely on an overdraft to support everyday expenses. Not advisable to maintain a permanent overdraft - expensive​
40
5 example of Creating a more even spread of sales revenue
One reason why Mars Ltd introduced the Mars Ice Cream was because sales of chocolate fall in the summer months. This strategy means that it is less likely that Mars will become short of cash in the summer months.​
41
5 example of Spreading costs more evenly
Pay utility bills such as gas and electricity on a monthly basis rather than quarterly or once every six months.​
41
5 example of Achieving a certain level of liquid, non-cash items.​
Many businesses set an objective to hold stock. If the business does run low on cash, it can turn these assets into cash quickly.​
42
5 example of Raising certain levels of cash at a particular point in time.​
If the business knows through its cash flow forecasts that it needs to acquire a higher level of cash at a certain time (e.g. a retailer building up stock levels for Christmas), it may set an objective of raising a particular level of cash.​
43
5 example of Setting contingency fund levels​
Emergency source of finance that can be used if unexpected difficulties occur​
44
5 what do cash flow objectives depend on?
financial position of the business
45
4 what is favourable variance
costs lower than budget revenue higher than budgeted profit higher than budgeted opposite is trye for all
46
6 what is profitability
The measure of a firm’s ability to keep a proportion of revenue after all costs have been paid.​
47
6 Why do we measure Profitability?​
Simply stating an amount of profit does not determine:​ How well the firm is managing its costs​ How it compares to similar firms in the same industry​ What proportion of revenue is kept​ Measure against previous years and highlight any improvements or causes for concern
48
6 what is profit and loss
If revenue > total costs = profit​ If revenue < total costs = loss
49
6 what is gross profit?
​revenue - direct costs= gross profit Gross profit broad measure of profit and can identify wastage and fall in efficiency of production
50
6 what is operating profit
gross profit - indirect costs Fair measure of profit as takes in to account all trading activities​
51
6 how do you get profit for the year?
revenue - direct costs = gross profit - indirect costs = operating profit operating profit adjusted by tax and interest = profit for the year
52
6 how do you increase profit equation?
(new profit - old profit)/ old profit x 100 = %
53
6 how do you gross profit margin equation?
(gross profit)/ revenue x100 = %
54
6 how do you operating profit margin equation?
(operating profit)/revenue x100 = %
55
7 what are fixed costs
indirect costs must be paid even if the firm sells nothing may change in time but don't change by a set amount often presented as a a cost per month, per year, per week etc
56
7 what are variable costs
directly change with output
57
7 what is revenue
money received from selling goods or services
58
7 what is profit
what's left after revenue - costs
59
7 what is contribution
selling price - variable cost per unit
60
7 what is Break Even
when total costs = revenue no profit or loss made (fixed costs)/(contribution per unit)
61
7 what's the impact on break even point when Increase selling price decrease selling price
inc- reduced BE dec- increased BE
62
7 what's the impact on break even point when Increase varaiable costs decrease variable costs
inc- increased BE dec- reduced BE
63
7 what's the impact on break even point when Increase fixed costs decrease fixed costs
Inc- increased BE red- Reduced BE
64
7 what is the equation for Break Even
(Fixed costs)/(Contribution per unit) Contribution = selling price - variable cost per unit
65
7 what is the uses and benefits of a break even?
can help decide whether a new business should start trading, sell a product or set up a new location forecasting help managers assess impact in change of level of production help support an application to financial institutions or investors for a loan or capital
66
7 what are some assumptions of break even?
selling price stays the same fixed costs remain the same variable costs vary in direct proportion to output all units are sold
67
7 what are some limitations of break even?
over simplified model based on a forecast so unreliable dependent on accuracy only shows short-term situations

Business A Level (23 decks)

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