5.2 Analysing Financial Performance Flashcards
What is a budget?
Agreed financial plans with a target set for a given period of time.
How to calculate profit budget:
Income budget - expenditure budget.
Why are budgets often calculated for a whole year?
To remove any affects seasonal demand may have.
How to calculate variance?
Budget figure - actual figure.
What is the difference between an adverse and favourable variance?
Favourable - costs are lower/revenue is higher than expected.
Adverse - costs are higher/revenue is lower than expected.
What is the opening balance of a cash flow forecast?
Cash available at the start of the month.
What are cash inflows?
Cash received into the business.
What are cash outflows?
Cash leaving the business.
What is net cash flow?
Cash inflow - cash outflow.
What is the closing balance?
Money available at the end of the month.
Define breakeven.
The volume of sales needed to cover all costs.
Neither a profit or loss is made.
Why is a breakeven figure useful?
Can help guide decision making.
To know the level of output needed to make a profit.
Easier obtaining of profit.
What is the margin of safety?
The amount by which demand can fall before the business starts making a loss.
How would you calculate break even?
Total fixed costs/Contribution per unit
How would you calculate margin of safety?
Actual sales - break even sales.
What effect would an increase in revenue have on the break even point?
Break even point will fall.
How would an increase in costs affect the break even point in a business?
Break even point will rise.
How to calculate contribution?
Selling price - variable costs.
How to calculate total contribution?
Contribution per unit x total sales.
What is profitability?
The efficiency of the business at generating profit in relation to the size of the business.
How would you calculate a profit margin?
Profit/turnover x100
What does a high gross profit margin show?
The business is efficient at controlling their variable costs e.g. raw materials.
What does a high operating profit margin show about a business?
They are efficient at controlling all costs.
Good for analysing overall performance.
Name 1 advantage of break even analysis.
Influence decision making e.g. whether new products are launched.
If it takes an unrealistic volume of sales to break even, may decide to not launch product.
Explain one disadvantage of break even analysis.
Assumes variable costs will be constant,however may vary with economies of scale.
Why is budgeting good?
Can review/measure progress.
Control spending.
What are the drawbacks of budgeting?
Can cause competition within business as departments fight for money.
Doesn’t account for external/unpredictable factors e.g.politics/war increasing costs of materials.
