5.2 Analysing financial performance Flashcards
Why will a business use cash flow forecasts
To estimate their total cash inflows and their total cash outflows for a future period of time
What is shown a cash flow forecast and what are they
- 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
Why do businesses have 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
How can a business improve cash flow
- 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
How to calculate net cash flow
Total inflows - total outflows
What is a revenue budget
Forecasts expected revenues for a business during a period.
Favourable variance = actual revenue higher than forecast
Adverse variance = if revenue is less than expected
What is an expenditure budget
Forecasts expected costs for a business during a period
Favourable variance = lower actual cost than forecast
Adverse variance = higher actual cost than forecast
What is a profit budget
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
Advantages of budgeting
- 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
Why do businesses use breakeven analysis
To predict the level of output at which total costs and total revenues will be the same
What is contribution per unit
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
How to calculate contribution per unit
Selling price per unit - variable cost per unit
What is 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
How to calculate total contribution
Total revenue - total variable costs
What are gross profit targets
involve the amount of profit remaining once direct costs ( cost of sales ) have been paid by the business
How to calculate gross profit margin
Gross profit / Revenue x 100
What is operating profit
Involve the amount of profit remaining once direct costs ( costs of sales ) and indirect costs (expenses) have been paid by the business
How to calculate operating profit
(operating profit / sales revenue) X 100
What is a profit for the year target
Involves the amount of profit remaining once all costs and financing fees have been considered
How to calculate profit of the year
(profit for the yar / sales revenue) X 100
How to calculate labour turnover
(total number of staff leaving / average number of total staff) X 100
Why could there be a high labour turnover
- if competitors offer higher wages and salaries
- if employees are demotivated
Advantages of low staff turnover
- experienced employees remain within the business
- training and recruitment costs are low as there are fewer vacancies to be filled
Disadvantage of low staff turnover
Fewer opportunities for the business to recruit new talent, skills and ideas
How to calculate retention rates
(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
A cause of high retention rates is
- the business pays a higher salary or wage than its competitor - employees are motivated, empowered and valued
How to calculate labour productivity
Total output / total number of employees
Why does calculating labour productivity benefit HR managers
They may reward employees if productivity is increasing, though may plan training for employees if productivity is decreasing
Why does calculating employee costs as a % of turnover allow HR to assess
the amount that is spent on staffing costs
How to calculate employee costs as a % turnover
(Total employee costs / total revenue) X 100
How to calculate labour cost per unit
(total labour costs / total units produced)
importance of labour costs per unit
- 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
How to improve labour costs per unit
Increasing productivity or reducing employee costs
