Analysing Finacial and Non-Financial Performance Flashcards
What is a budget?
A budget is a financial plan for the future.
Without a budget business’s can run into financial problems.
Why is a budget important ?
So a business does not go into bankruptcy.
Advantages of budgets
-Promotes coordination and communication among subunits within the company.
-Provides a framework for judging performance and facilitating learning.
-Motivates managers and other employees.
-Financial Planning: They help individuals and organisations plan how they will allocate their resources to meet their financial targets
Limitations of Budgets
-Lack of flexibility, can’t react to changes in the market
-Focused on the short-term.
-has to be based on good quality info
-if managers and employees are excluded from budgeting process might feel demotivated
Budget Variances
Budget Variances is to check actual outcomes against predicted outcomes.
AKA Variances analysis
Variance analysis
Favourable is when the results are better than the predicted out come so positive
Unfavourable / Adverse this is when the results are worse than budgeted. So negative
Reasons for Budget Variances
Sales Variances
-Favourable
*Successful advertising campaign
*Demise of competitor
*Bonus scheme for sales team
-Adverse
*Successful activities of competitors
*Ineffective advertising
*logistical problems
*Bad weather
Cost Variances
-Favourable
*Improved labour productivity
*Reduced cost of imported components
*Cheaper supplier
-Adverse
*waste of production
*strike by dockers
*bad weather
*devaluation of the pound
*price rise from suppliers
Income statement
An income statement a historical record of a business over a specific period. It typically shows profit or loss made by the business
Why is an income statement important ?
- Allows shareholders to see how the business has performed.
-Allows for comparison with other similar businesses - Providers of finance can see if the business can make sufficient funds
-It is a legal requirement for businesses to provide a financial record of the business
key components of the income statement
-sales revenue (sales made to customers)
-cost of sales ( cost of generating revenue e.g raw materials)
-gross profit ( difference between revenue and cost of sales)
-expenses ( expenses not related to producing goods e.g wages)
-net profit ( all business’s revenue and expenses)
-corporation tax
-profit after tax
-dividends
-retained profits (amount of profit kept by business and can be used next year)
When analysing Income statement the following should be considered
-comparing performance over time
-comparing performance against competitors or the industry in which the business operates
-benchmarking - comparison against other businesses who are not direct competitors can also be useful if they help set the standard that the business aims to achieve
Areas to target when analysing trading, profit or loss accounts.
Sales Revenue
Cost of sales
Gross profit
Net profit
