204- Analysing Financial performance Flashcards
Evaluate the use and impact of budgets and budget variances for a business and its stakeholders
(+)Understand when money is coming in and out to help avoid cash flow difficulties. To maximise inflows and minimise outflows
(+)set department targets for individual managers to focus on
(+)Set and monitor achievements of targets which can be motivating for employees
(-)Factors are out of business control e.g. competitors/actions. Not be able to predict this, making it less useful.
(-)Only a prediction can be unreliable and affect the accuracy of the budgets and therefore the budget variance
(-)Could exclude certain employees and make them less motivated
(-)Unrealistic budgets can be unmotivating i.e. if the budgets are set too high
Conclusion of budgets and budget variances
useful because it can assist with the planning and improvement of important elements of the business
Usefulness of budgets and budget variances depends on
-The experience of the budget setter
-The stability of the market
-The amount of historical data available
-The extent to which the budgets are used and adhered to within a business and the depth of the variance analysis completed
-Depends on the size of the business - a small business may not have the time or the knowledge
what is a balance sheet and what is the other name for it?
Statement of financial position
-is a statement of a business’s assets and liabilities at a specific point in time (shows what the business has, what the business owes and how the business is financed)
What are the main components of a balance sheet?
1)Assets
-Fixed/non-current assets
-Current assets
2)Liabilities
-current liabilities
-Long-term/non-current liabilities
3)Shareholder funds
what are fixed assets (non-current)?
What are current assets
-FA=assets expected to be retained in the business for more than a year e.g.land, furniture etc
-CA = assets the business owns that are expected to be turned into cash within 1 year e.g. stock, debtors and cash
What are Current liabilities?
What are non-current liabilities (long-term)?
-CL = debts that are normally paid within a year e.g. overdraft and payables (suppliers)
-NCL = repaid over more than a year e.g. bank loans and mortgages
Net assets (formula)
-TA(FA+CA) - TL(CL+NCL)= net assets
-total assets (fixed assets + current assets) - Total liabilities (current liabilities + Non-current liabilities)
What is Working capital?
What is the formula?
-The money needed in the business to pay for the day-to-day expenses of a business
-WC= current assets - current liabilities
Negative vs positive Working capital
Negative = CL greater than CA i.e. could lead to debt
Positive = enables a business to pay for the day-to-day expenses like wages, salaries and other operating expenses
What is capital employed?
What is the formula?
-The amount of money that is used to finance a business in the long term. This finance has been either invested by shareholders or borrowed long term
-CE = shareholders’ funds + long-term liabilities
What is depreciation?
What is the formula?
-The decrease in value of fixed assets over time
- Depreciation = Historical costs (original costs) - residual value / useful life of asset (expected life of asset)
What is return on capital employed (ROCE)?
What is the formula?
-How effectively a business is creating a profit based on the money invested within a business.
-Net profit before tax / CE (shareholders’ funds + non-current liabilities) x100
What is current ratio?
What is the formula?
- Shows the business’s ability to meet its short term payments e.g.suppliers. It is expressed as a ratio :1
-Current assets / current liabilities
What is the ideal current ratio? Why is this ideal?
between 1.5:1 and 2:1
-Below 1.5:1 means they may not be able to pay its short term debts
-Above 2:1 means they have spare cash that is not being used productively
-some can happily survive on low ratios if they have high levels of stock turnover - large volumes of stock but sell this quickly and constantly e.g.Tesco
