3.5.2- Analysing financial performance

Question 1

What is a cash flow forecast used for?

Answer 1

To predict the money that will come in and out of the business

Question 2

What affects the lenght of a cash flow cycle?

Answer 2

• The type of product- How long its held in stock. E.g food isnt held long
• Credit payments- How long until the business pays its creditors

Question 3

What are the people who are owed money by the business called?

Answer 3

Creditors

Question 4

What are businesses who owe money called?

Answer 4

Payables

Question 5

What are the people who owe the business money called?

Answer 5

Debtors

Question 6

What is the money owed to a business called?

Answer 6

Recievables

Question 7

What is an ideal cash flow situation?

Answer 7

The business being given a longer credit period by its creditors (suppliers) than it gives its debtors (customers)

Question 8

What is budgeting?

Answer 8

A financial plan that sets targets for how much money they’re going to make and how much they spend.

Question 9

What are the three types of budgeting?

Answer 9

• Income budgets
• Expenditure budgets
• Profit budget

Question 10

What are the strengths of budgets?

Answer 10

• Can help achieve targets
• Can help to control income and expenditure
• Can review their activites and make decisions
• Can persuade investors the business is succesful

Question 11

What are the weaknesses of budgets?

Answer 11

• Inflation is difficult to predicta
• Can be innacurate
• Time consuming

Question 12

What is a variance?

Answer 12

The differene between actual and budgeted figures

Question 13

What external factors cause variances?

Answer 13

• Competitor behaviour- increase/decrease demand
• Changes in the economy- affects wages
• Cost of raw materials

Question 14

What internal factors causes variances?

Answer 14

• Improving efficiency
• Business can overestimate
• Businesses can uderestimate

Question 15

How do businesses react to an adverse variance?

Answer 15

• Change the marketing mix
• Cutting prices (only if high demand)
• Updating product
• Motivate employees to work harder
• Cut costs- ask suppliers for better deal
• Do market research to improve forecast in future

Question 16

How do businesses react to an favourable variance?

Answer 16

• Can set more ambitious targets
• Favourable variance could indicate high sales, more production needed

Question 17

What is break-even?

Answer 17

Where profits and costs are equaL. No profits no loss

Question 18

What do break-even charts do?

Answer 18

Shows costs and revenue plotted against output to see how cost and revenue varies with output

Question 19

What is margin of safety?

Answer 19

The amount between actual output and break-even

Question 20

What are the strengths of break-even analysis?

Answer 20

• Its easy to do
• Its quick
• Lets businesses forecast different variations
• Can use it to persuade bank for a loan
• Can influence whether new products should be launched

Question 21

What are the weaknesses of break-even analysis?

Answer 21

• Assumes VC always rise steadily
• Its simple for a single product not multiple
• If the data is wrong, the results are is wrong
• Only tells how much units you need not how muc your going to sell