5.2 Analysing financial performance

Question 1

Why will a business use cash flow forecasts

Answer 1

To estimate their total cash inflows and their total cash outflows for a future period of time

Question 2

What is shown a cash flow forecast and what are they

Answer 2

• total inflows = include all cash inflows coming into the business during the period
• total outflows = includes all cash outflows leaving the business during the period
• net cash flow = difference between total inflows and total outflows
• opening balance = the balance at the start of the month and is the same as the closing balance the previous month

Question 3

Why do businesses have cash flow problems

Answer 3

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

Question 4

How can a business improve cash flow

Answer 4

• Money owed to the business is known as a RECEIVABLE and businesses can reduce the trade credit period given to increase how quickly they receive their receivables
• Money owed by the business to others is known as a DEBTOR (or payable) and a business can ask others for longer trade credit to reduce how quickly they must pay payables

Question 5

How to calculate net cash flow

Answer 5

Total inflows - total outflows

Question 6

What is a revenue budget

Answer 6

Forecasts expected revenues for a business during a period.
Favourable variance = actual revenue higher than forecast
Adverse variance = if revenue is less than expected

Question 7

What is an expenditure budget

Answer 7

Forecasts expected costs for a business during a period
Favourable variance = lower actual cost than forecast
Adverse variance = higher actual cost than forecast

Question 8

What is a profit budget

Answer 8

Revenue and expenditure budgets can be used to create profit budgets.
Favourable variance = overall profit is higher than forecast
Adverse variance = Overall profit is lower than forecast

Question 9

Advantages of budgeting

Answer 9

• helps businesses achieve targets and objectives
• help managers and leader focus on cost control which can increase profit
• can be used to motivate staff by providing spending authority to individual departments and teams

Question 10

Why do businesses use breakeven analysis

Answer 10

To predict the level of output at which total costs and total revenues will be the same

Question 11

What is contribution per unit

Answer 11

The amount of revenue which contributes to covering a business’ fixed costs after the variable cost per unit has ben taken away from revenue per unit

Question 12

How to calculate contribution per unit

Answer 12

Selling price per unit - variable cost per unit

Question 13

What is total contribution

Answer 13

The amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away

Question 14

How to calculate total contribution

Answer 14

Total revenue - total variable costs

Question 15

What are gross profit targets

Answer 15

involve the amount of profit remaining once direct costs ( cost of sales ) have been paid by the business

Question 16

How to calculate gross profit margin

Answer 16

Gross profit / Revenue x 100

Question 17

What is operating profit

Answer 17

Involve the amount of profit remaining once direct costs ( costs of sales ) and indirect costs (expenses) have been paid by the business

Question 18

How to calculate operating profit

Answer 18

(operating profit / sales revenue) X 100

Question 19

What is a profit for the year target

Answer 19

Involves the amount of profit remaining once all costs and financing fees have been considered

Question 20

How to calculate profit of the year

Answer 20

(profit for the yar / sales revenue) X 100

Question 21

How to calculate labour turnover

Answer 21

(total number of staff leaving / average number of total staff) X 100

Question 22

Why could there be a high labour turnover

Answer 22

• if competitors offer higher wages and salaries
• if employees are demotivated

Question 23

Advantages of low staff turnover

Answer 23

• experienced employees remain within the business
• training and recruitment costs are low as there are fewer vacancies to be filled

Question 24

Disadvantage of low staff turnover

Answer 24

Fewer opportunities for the business to recruit new talent, skills and ideas

Question 25

How to calculate retention rates

Answer 25

(total number of staff who worked at a business for the whole period of time / total number of staff at the beginning of the period of time) X 100

Question 26

A cause of high retention rates is

Answer 26

• the business pays a higher salary or wage than its competitor - employees are motivated, empowered and valued

Question 27

How to calculate labour productivity

Answer 27

Total output / total number of employees

Question 28

Why does calculating labour productivity benefit HR managers

Answer 28

They may reward employees if productivity is increasing, though may plan training for employees if productivity is decreasing

Question 29

Why does calculating employee costs as a % of turnover allow HR to assess

Answer 29

the amount that is spent on staffing costs

Question 30

How to calculate employee costs as a % turnover

Answer 30

(Total employee costs / total revenue) X 100

Question 31

How to calculate labour cost per unit

Answer 31

(total labour costs / total units produced)

Question 32

importance of labour costs per unit

Answer 32

• HR managers can compare data to previous years, to competitors and to the wide industry
• if HR managers are unhappy with their current labour cost per unit, they may decide to increase productivity, so that employees produce more, or they may reduce employee costs

Question 33

How to improve labour costs per unit

Answer 33

Increasing productivity or reducing employee costs