5.2 Financial Performance Flashcards
(20 cards)
Why is cash important to a business
To pay supplies
To pay overheads
To pay employees
To prevent business failure
To grow as a business
What is a budget
A financial plan for the future to use to compare against actuals
What can a budget be used for
Planning
Motivation
Assessing reasons for gaps
Accountability
Purposes of a budget
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
What are the two types of budget
Historical
Zero based
What is historical budgeting
Based on extrapolation, learning lessons from past experiences , based on real life experience , reasonably straightforward
What is zero- based budgeting
Starting from scratch, managers have to estimate budget , have to justify to senior management
What is variance analysis
Compares what actually happened to what the budget says
Formula for variance
Actual - budgeted
(Income , profit or costs )
Difficulties of budgeting
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
What is break even
When total revenue is equal to total costs
Break even formula
Foxed costs / contribution
Formula for contribution
Selling price per unit - variable costs per unit
Margin of safety formula
Actual sales - break even point
Pros of using break even
Know when costs are covered
Work out indicative results based on movement eg of price
Planning
Cons of using break even
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
Pros of using a break even graph
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
Cons of using a break even graph
Straight lines are not realistic
Simplistic approach
Could lead to wrong decision made from basic information
Still only a prediction
