2. Analysing Financial Performance Flashcards
Cash Flow
Businesses can use cash-flow forecasts to estimate their total cash inflows and their total cash outflows for a future period of time.
Net Cash Flow
Net cash flow is the difference between total inflows and total outflows.
Cash Flow Problems
Businesses that are profitable but have cash-flow or liquidity problems can become bankrupt as they lack short-term cash to pay short-term debts.
Improving Cash Flow
To improve cash flow a business must either increase the speed of receivables of decrease the speed of debtors
Revenue Budgets
A revenue budget forecasts expected revenues for a business during a period.
Expenditure Budgets
An expenditure budget forecasts expected costs for a business during a period.
Profit Budgets
Revenue and expenditure budgets can be used to create profit budgets.
Favourable Variance
When results are better for a business than projected
Adverse Variance
When results are worse for a business than projected
Advantages of Budgeting (x3)
Budgets help businesses achieve targets and objectives.
Budgets help managers and leaders focus on cost control which can increase profit.
Budgets can be used to motivate staff by providing spending authority to individual departments and teams.
Contribution per Unit
The amount of revenue which contributes to covering a business’ fixed costs after the variable cost per unit has been taken away from revenue per unit.
Calculate Contribution per Unit
Selling price per unit – Variable costs per unit.
Total Contribution
The amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away.
Calculate Total Contribution
Total revenue – total variable costs.
Gross Profit Targets
Gross profit targets involve the amount of profit remaining once direct costs (cost of sales) have been paid by the business.
