5.2 - Analysing financial performance Flashcards
What is a cash flow forecast, and why is sufficient cash flow essential to a business?
Cash flow forecasts:
Total inflows include all cash inflows coming into the business during the period.
Total outflows include all cash outflow leaving the business during the period.
Net cash flow is the difference between total inflows and total outflows.
The opening balance is the balance at the start of the month and is the same as the closing balance of the previous month.
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.
What is budgeting?
Businesses can use budgets to forecast revenue, expenditure, and profit during a period.
State three examples of budgeting.
Revenue budgets
A revenue budget forecasts expected revenues for a business during a period. If actual revenue is higher than the forecast, we call this ‘favourable variance’. If revenue is less than expected, we call this ‘adverse variance’.
Expenditure budgets
An expenditure budget forecasts expected costs for a business during a period. A higher actual cost than forecast is an adverse variance, and a lower actual cost than forecast is a favourable variance.
Profit budgets
Revenue and expenditure budgets can be used to create profit budgets. If overall profit is higher than forecast, there is a favourable variance. If overall profit is lower than forecast, there is an adverse variance.
What are the advantages of budgeting?
Advantages of budgeting:
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.
What is break-even analysis?
Businesses can use breakeven analysis to predict the level of output at which total costs and total revenues will be the same.
How do you calculate contribution per unit?
Selling price per unit - variable costs per unit
What is total contribution, and how is it calculated?
Total contribution is the amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away. (Total Contribution is the difference between Total Sales and Total Variable Costs)
Contribution = total sales/revenue - total variable costs
or
Contribution per unit x number of units sold
What is gross profit?
Gross profit targets involve the amount of profit remaining once direct costs (cost of sales) have been paid by the business.
gross profit = revene - cost of goods sold
How is gross profit margin calculated?
Gross profit margin = (gross profit ÷ sales revenue) × 100
What is operating profit, and how is it calculated?
Operating profit is a company’s profit after all expenses are taken out except for the cost of debt, taxes, and certain one-off items
Revenue - Operating Costs - Cost of Goods Sold (COGS) - Other Day-to-Day Expenses = Operating Profit.
What is net profit, and how is it calculated?
Total amount eared after every expense is accounted for.
Total Revenue — Total Expenses
What is variance analysis?
Spotting variances in data and figuring out why they’ve happened.
What is a variance?
Difference between actual figures and budgeted figures
Favourable variance = if actual figures are better than predicted
Adverse variance = Worse figures than predicted
What is a cumulative variance?
= when variances are totalled together - EG. If sales exceed 2000 and expenditure is £3000 lower than expected then the cumulative variance is favourable at £5000
Internal causes of variance - name two
Overestimation or underestimation of costs to changes in the business.
Improving efficiency may cause favourable variances.
