Analysing financial performance Flashcards
What is a budget
An estimate of income and expenditure for a business covering a set period of time.
Favourable variance?
where actual results are better than budgeted for. E.G costs are lower
Unfavourable variance
where the actual results are worse than budgeted for E.G costs are higher
Advantages of budget + variance analysis
Business can combine various sets of data and expertise to predict the the income and expenditure needed to meet business objectives.
Allow managers and stakeholders to monitor performance against budgeted.
Budgets can act as a method of motivating staff through management by objectives, with pay linked achievements, like reducing expenditure by 10% of budget.
managers can choose to ignore areas of the budget with little or no variance from that planned, focus efforts on areas that require attention rather on those that are running smoothly.
Disadvantages of budgets + variance
Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic.
Budgets need to be changed as circumstances change which can lead to more costs for the business.
budgeting is a time consuming process and the larger the business the more time consuming process, eg financial department spend long on this.
Employees may be demotivated if business blames them for variances in the budget.
current assets
cash or other assets that can be converted into cash within 12 months
current liabilities
the amounts due to be paid out within 12 months
Non current asset
assets that cannot usually be converted to cash within 12 months of the balance sheet.
non current liabilities
long term financial obligations that are due in the longer term usually more than 12 months after balance sheet.
equity
any funds contributed by the owners or stockholders plus any retained earnings.
Working capital
The cash needed to pay for the day-to-day operations of the business.
Working capital= current assets-current liabilities
capital employed
the total amount of capital that is used for the acquisition of profits by a firm or particular project.”
Capital employed= share capital+ retained earnings + long term borrowings.
Depreciation
an amount deducted from the original cost of an asset, to take into account wear and tear. Original cost of fixed asset/useful life of the asset
Liquidity
A measure of the extent to which a business has cash to meet its immediate short-term obligations.Or assets that can be quickly converted into cash to do this.
Return on capital employed
a financial ratio measuring what returns the business has made on the resources available to it.
Operating profit/capital employed x 100