3.5.2 Financial Management Flashcards
(23 cards)
What is a budget in business?
A financial plan that forecasts income and expenditure over a specific period. Budgets help control finances and measure performance.
What is variance analysis?
The process of comparing actual results to the budgeted figures to assess performance.
What is an adverse variance?
When actual performance is worse than the budgeted target.
E.g., costs higher than expected or revenues lower than expected.
What is a favourable variance?
When actual performance is better than the budgeted target.
E.g., higher sales or lower costs than expected.
What is the value of budgeting?
• Helps with planning and control
• Encourages efficiency
• Motivates staff with targets
• Aids performance evaluation
• Facilitates communication and coordination
What is a cash flow forecast?
A projection of a business’s cash inflows and outflows over a period to ensure liquidity and avoid cash shortages.
What is break-even output?
The level of output at which total revenue equals total costs – no profit or loss.
Formula for break-even output:
Break-even Output = Fixed Costs ÷ Contribution per Unit
What is contribution per unit?
Selling Price – Variable Cost per Unit
It shows how much each unit contributes toward covering fixed costs and generating profit.
What is total contribution?
Contribution per Unit × Number of Units Sold
Or:
Total Revenue – Total Variable Costs
What is the margin of safety?
The difference between actual output and break-even output. It shows how much sales can fall before a loss is made.
How does a change in price affect the break-even point?
• Higher price → higher contribution per unit → lower break-even output.
• Lower price → lower contribution per unit → higher break-even output.
How does a change in costs affect break-even?
• Higher fixed or variable costs → increase in break-even output.
• Lower costs → lower break-even point.
What is the value of break-even analysis?
• Helps assess viability
• Supports pricing decisions
• Identifies safety margin
• Aids financial planning and risk assessment
What is gross profit?
Gross Profit = Revenue – Cost of Sales
It measures profitability from direct production activities.
What is profit from operations (operating profit)?
Operating Profit = Gross Profit – Operating Expenses
Shows profitability from core operations, excluding finance costs and tax.
What is profit for the year (net profit)?
Net profit = Operating Profit – Interest – Tax
Represents the final profit available to shareholders.
What is the importance of analysing profit margins?
• Indicates efficiency and profitability
• Helps assess business performance
• Guides cost control and pricing strategies
What are payables (creditors)?
Amounts a business owes to suppliers. It reflects how long the business takes to pay for its purchases.
What are receivables (debtors)?
Amounts owed to the business by customers. It reflects how long the business takes to collect money from sales on credit.
Why is analysing timings of cash flow important?
• Prevents liquidity problems
• Helps manage working capital
• Identifies cash shortages or surpluses
• Supports credit control decisions
How is data used in financial decision making?
• To set realistic budgets and forecasts
• To analyse past performance
• To support investment and pricing decisions
• To evaluate cost structures
• To plan for growth or cost reduction
What are the limitations of financial data in decision making?
• Can be based on assumptions
• Doesn’t reflect qualitative factors
• May be influenced by external changes
• Only shows historical or estimated figures
