5.2 Financial Performance Flashcards

(20 cards)

1
Q

Why is cash important to a business

A

To pay supplies
To pay overheads
To pay employees
To prevent business failure
To grow as a business

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2
Q

What is a budget

A

A financial plan for the future to use to compare against actuals

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3
Q

What can a budget be used for

A

Planning
Motivation
Assessing reasons for gaps
Accountability

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4
Q

Purposes of a budget

A

Forecasting
Planning
Communication (of objectives)
Motivation
Raising finance
Managing income and expenditure
Prioritising areas of the business
Improve efficiency
Encourage delegation
Increasing responsibility levels
Creates accountability

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5
Q

What are the two types of budget

A

Historical
Zero based

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6
Q

What is historical budgeting

A

Based on extrapolation, learning lessons from past experiences , based on real life experience , reasonably straightforward

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7
Q

What is zero- based budgeting

A

Starting from scratch, managers have to estimate budget , have to justify to senior management

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8
Q

What is variance analysis

A

Compares what actually happened to what the budget says

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9
Q

Formula for variance

A

Actual - budgeted
(Income , profit or costs )

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10
Q

Difficulties of budgeting

A

Dependent upon predictions and forecasts
Costs are subject to change
Actions of competitors are unknown
Managers may lack experience
May be subject to bias
Take time and effort
External factors

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11
Q

What is break even

A
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12
Q
A
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13
Q
A

When total revenue is equal to total costs

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14
Q

Break even formula

A

Foxed costs / contribution

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15
Q

Formula for contribution

A

Selling price per unit - variable costs per unit

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16
Q

Margin of safety formula

A

Actual sales - break even point

17
Q

Pros of using break even

A

Know when costs are covered
Work out indicative results based on movement eg of price
Planning

18
Q

Cons of using break even

A

False sense of security
Still based on estimates
Relies on one price, one cost, one product
Doesn’t take account of economies of scale
Doesn’t take external factors into account

19
Q

Pros of using a break even graph

A

Visual representation and easy to use
Can help to see “what happens if “ shift in lines
Can visualise profit
Can see bigger picture on one graph

20
Q

Cons of using a break even graph

A

Straight lines are not realistic
Simplistic approach
Could lead to wrong decision made from basic information
Still only a prediction