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Component 2 > Analysing financial/non financial performance. > Flashcards

Analysing financial/non financial performance. Flashcards

1
Q

What are budgets?

A

an estimate of income and spending for a business over a set period of time. Their purpose is to help businesses meet and plan financial objectives, allocate resources and staff and monitor performance.

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2
Q

What is a budget variance?

A

The difference between the budgeted value and the actual outcomes.
Actual outcome - budget outcome.

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3
Q

What is a favourable variance?

A

positive impact on the business. Lower costs, higher sales etc.

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4
Q

What is an adverse variance?

A

negative impact on business. Higher costs, lower revenue.

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5
Q

Analysing favourable variances.

A

In general favourable variances are good, although the business may not have planned where the extra capital should be allocated.

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6
Q

Analysing adverse variences.

A

Adverse variances can lead to lower gross profits and net profits, however if sales revenue has also increased, adverse variances show the cost of production has increased to match the extra demand.

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7
Q

Why do variances occur?

A

-Competitor actions.
-External shocks and changes in economic climate.
-Suppliers change prices.
-Interest on loans increases.
-Shareholder investment changes.
-Change in demand.
-Marketing success/failure.

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8
Q

Advantages of budgets an budget variances.

A

-Can combine various sets of data and expertise of staff to predict cash flow problems. Helps to anticipate these problems and increase ability to pay creditors.
-Limited resources can be used effectively and tiger financial control.
-Allows performance to be monitored.
-Can motivate staff by providing targets and improve communication through the hierarchy.

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9
Q

Disadvantages of budgets and budget variances.

A

-Inaccurate data can lead to inaccurate variances and is also constantly changing.
-Can lead to inflexibility in decision making.
-Time consuming especially for larger businesses.
-Employees may become demotivated if they are held accountable for variances.
-Can result in short term decisions to keep within a budget, rather that the right ones for the future that would exceed the budget.

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10
Q

What is depreciation?

A

=The method by which a fall in the value of a fixed asset is recognised in the financial accounts of a business, so assets are given a realistic value.

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11
Q

Formula for straight line depreciation?

A

Reduction in value each year= (historic value-residual value)/expected life.

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12
Q

Why is depreciation important?

A

-Overtime machines become worn out and obsolete. So if the full value was included it would be an overstatement in the balance sheet.
-If they were overstating (window dressing) it could affect their reputation.
-Legal requirement to devalue fixed assets.

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13
Q

What is an income statement?

A

=A record of the historic trading over a specific period of time.

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14
Q

Why are income statements important?

A

-Allows shareholders to see how a business has performed and whether it has made an acceptable return.
-Enables comparison with similar businesses.
-Allows providers of finance to assess risk.
-Limited companies have to provide financial accounts.

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15
Q

What are the components of the income statement?

A

Sales revenue, cost of sales, gross profit, expenses, net profit, corporation tax, profit after tax, dividends, retained profit.

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16
Q

What is gross profit margin?

A

GPM= GP/SR x100.

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17
Q

What is net profit margin?

A

NPM= NP/SR x100

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18
Q

What do you consider when analysing an income statement?

A

Sales rev- a sign that a business is attracting or losing customers.
Cost of sales- increasing/falling will affect gross profit.
Gross profit- how efficient a business is at making its products.
Net profits- the true indicator of profitability.

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19
Q

Why do we analyse income statements?

A

-Comparing over time.
-Benchmarking with competitors.
-Comparing competitors in the industry.

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20
Q

Analysing the components of an income statement?

A

Sales rev- a sign that a business is attracting or losing customers.
Cost of sales- increasing/falling will affect gross profit.
Gross profit- how efficient a business is at making its products.
Net profits- the true indicator of profitability.

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21
Q

What is a balance sheet?

A

=A summary of the assets and liabilities of a business at a particular moment in time.

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22
Q

Who are balance sheets important to?

A

-Bankers- looking at long term borrowing.
-Suppliers- can see money owed by the business.
-Investors.
-Staff- will want to see how accumulated profit has been shared.

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23
Q

What are the components of a balance sheet?

A

Current assets, fixed assets, current liabilities, long term liabilities, shareholder funds, net current assets, net assets.

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24
Q

What are current assets?

A

cash or other assets that can be converted into cash within 12 months. Trade receivables, stock. Change to this affects working capital.

25
Q

What are fixed assets?

A

assets we expect to have for more than 12 months. Property, machinery, vehicles, equipment. Change to this indicates a change in the size of the business.

26
Q

What are current liabilties?

A

Amount due to be paid out of the business within 12 months. Trade payables, other payables, current tax liabilities. Change affects working capital.

27
Q

What are long term liabilties?

A

long term financial obligations that are not due for more than a year. For example a bank loan. Changes to this can have positive or negative impacts, because of interest rates and opportunities for growth.

28
Q

What are shareholder funds?

A

reveal the origins of funds. Share capital and retained profits. Want more funding from this and not loans.

29
Q

What are net current assets?

A

current assets-current liabilities. Also known as WORKING CAPITAL.

30
Q

What are net assets?

A

total assets-total liabilities.

31
Q

What should be equal on a balance sheet?

A

Shareholder funds and net assets should be equal (balance).

32
Q

What is working capital?

A

=The day to day cash needed by the business for the operation of it. Higher working capital means improved liquidity, which is the extent to which a business has cash to meet its short term obligations.

Current assets - current liabilities.

33
Q

What are problems with working capital caused by?

A

poor control of stocks and trade debtors, ineffective use of trade creditors, poor cash flow forecasting and unexpected events.

34
Q

What factors affect working capital?

A

The need to hold stock, lean production, expected credit period by customers, effectiveness of the credit control, credit period offered by suppliers.

35
Q

What is capital employed?

A

=The total resources a business currently has available. In other words it is money used.

=Share capital + retained profit + long term liabilities.

36
Q

What is return on capital employed?

A

a ratio that tells us what returns a business is making on the resources available to it.

Net profit/capital employed x100.

The higher the figure, the more efficiently a business is turning resources into profit. Shareholders may invest more. Needs to be compared with other years.

37
Q

What is current ratio?

A

Assesses the solvency of a business- how able it is to pay off debts.
=Current assets/current liabilities.
A figure below is cause for concern. Too high of a figure indicates too much working capital.
Helpful to know industry averages, and general trends.

38
Q

What is acid test ratio?

A

Also assesses solvency but appreciates that stock cannot be sold immediately in order to pay liabilities.
=Current assets-stock/current liabilities.
Some businesses may hold a lot of stock, so as long as the rest of the industry is low, a low number may not be a significant concern.

39
Q

What is gearing ratio?

A

Assesses how much of capital employed is coming from long term loans.
=Long term liabilities/capital employed x100

40
Q

What is considered highly geared?

A

If highly geared a business is reliant on loans which poses financial risk because repayment and interest is not optional. >50%. However, loans may be of a low interest rate.

41
Q

What is considered a good gearing ratio?

A

25%-50%

42
Q

What is considered lowly geared?

A

<25% is a lowly geared business which may not be taking opportunities for growth.

43
Q

How is gearing reduced?

A

improving profits, repaying loans, retaining profits and selling more shares.H

44
Q

How is gearing increased?

A

focusing on growth, converting short term debt into long term loans, and buying back shares.

45
Q

What to consider when analysing financial position?

A

Ensures the business remains financially healthy and capable of meeting objectives.
Looking for trends over time helps to improve performance.
Identifies problems and inconsistencies.
Allows strategic decisions to be made.

46
Q

Problems with using accounts to analyse performance?

A

-Assets and liabilities- can be valued and recorded in numerous ways on a balance sheet. Methods may change overtime so trends become more difficult to see.
-Accounts can only provide figures. They give no explanation as to why the figures are better or worse. -They also give no indication of the future.
-For new businesses, previous accounts have little help.
-Current ratio is useless without the acid test ratio.
-Only being given a couple of years may be unrepresentative.
-Need to know competitors’ figures.

47
Q

What is window dressing?

A

manipulation of financial accounts to enhance financial position

48
Q

Examples of window dressing?

A

overstating value of brands, selling fixed assets but still using it by renting it, presenting data with distorted scales and hiding poor investments.Re

49
Q

Reasons for window dressing?

A

improve the share price, attract a takeover as the company is seemingly more successful, makes the business more expensive and might deter take-over bids, reduces taxes needed to pay, and improves its credit rating.

50
Q

What other factors affect the accounts?

A

Changes in demand can have a positive/negative affect on accounts.

Inflation- sustained increase in the cost of living, diminishes the financial performance of a business.

51
Q

Why to do we use non-financial performance?

A

Allows greater insight to the performance and trends.

52
Q

Customer attitude surveys?

A

Can be undertaken through quantitative and qualitative methods to assess the views of customers on a range of issues.
Qualitative- aims to gain opinions, beliefs and intentions.
Quantitative- looks at larger groups of people and asks questions which gain quantitative answers.
Allows the business to assess its strengths and weaknesses.

53
Q

Employee attitude surveys?

A

Surveys that look at staff satisfaction on a range of issues, and assess their training and development needs.
Helps businesses to assess effectiveness of policies and practice, identify low morale and facilitate HR change.

54
Q

Market share?

A

=the proportion of total market a business owns.
Businesses can use models based on market share, such as the Boston Matrix, to assess the best strategy for a product.
Market share is monitored to assess the success of strategies.

55
Q

Productivity?

A

Measures the output from employees over a period of time. Affects the costs of a business.
Comparing productivity levels help businesses identify problems which will have impact on costs and see whether updating equipment/training will improve productivity.
Can also compare with its competitors.

56
Q

What is an environmental record?

A

Refers to the impact of its operation and activities on the wider world.
Carbon emissions, packaging, waste disposal.

57
Q

What is sustainability?

A

the ability of a business to have little or no impact on the environment.

58
Q

Environmental record for performance?

A

There are laws to which businesses must abide by. The business will also set targets to meet legal and stakeholder commitments, which will be measured and compared against previous years.

59
Q

What is greenwashing?

A

advertising green credentials but practising little of the environmental policies.

Component 2 (8 decks)

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