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Business > Analysing financial performance > Flashcards

Analysing financial performance Flashcards

1
Q

advantages of budgets and budget variance analysis

A
  • controlling income and expenditure.
  • They act as a review and allow time for corrective
    action to take place.
  • Budgets provide clear targets to be met and should
    help employees to focus on costs.
  • Can act as a motivator for staff if budget is met
  • They help in the co-ordination of a business and
    improve communication between different sections of
    the business.
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2
Q

disadvantages of budgets and budget variance analysis

A
  • They can be time consuming for managers in small
    businesses; especially for those who are not particularly
    numerate.
  • If the actual figures are very different from the
    budgeted ones the budget can lose its significance.
  • The budget must not be too inflexible as business
    opportunities might be missed.
  • Poorly constructed budgets can lead to poor decision
    making.
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3
Q

What are the components of a balance sheet?

A
  • current assets
  • non current assets
  • current liabilities
  • non-current liabilities
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4
Q

What are trade payables?

A

Amounts owed to suppliers

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5
Q

What is equity?

A

Any funds contributed by the owners or stockholders

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6
Q

What is the formula for working capital?

A

Current assets - current liabilities

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7
Q

What is a good indicator for a business having sufficient cash?

A

It has enough working capital to pay off its short-term liabilities indicating liquidity

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8
Q

What is working capital cycle?

A

The amount of time it will take for the business to convert its working capital into revenue

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9
Q

Formula for straight line depreciation

A

Original cost of the fixed asset / useful like of the asset

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10
Q

What is total equity?

A

The total amount of money that shareholders have invested into the business, plus any retained earnings

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11
Q

ROCE formula

A

(Operating profit / capital employed) x100

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12
Q

Why is ROCE valuable to investors?

A

A business’s ROCE is compared to other similar businesses to assess which business will give them a better return on their investment.

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13
Q

What is operating profit?

A

The money a business makes from its regular activities after paying for things it needs to run (e.g. salaries / supplies)

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14
Q

What is current ratio?

A

Shows the businesses ability to pay the bills due within the next 12 months. A current ratio of between 1.5 and 2.0 is regarded as desirable

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15
Q

What is the desires acid test ratio?

A

Any figure above 1

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16
Q

What are accounts receivable?

A

The amount of money customers owe a business from paying off credit.

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17
Q

What is long term capital?

A

The funds available for long term investments (e.g. shares/loans/retained profit)

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18
Q

What is gearing ratio?

A

Measures the proportion of assets invested in a business that are financed by long term borrowing. It is a way of measuring the long term financial stability of a business.

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19
Q

Formula for gearing ratio

A

(Non-current liabilities / capital employed) x100

20
Q

An example of how having a higher level of borrowing imposes more risk on a business

A

E.g. if interest rates on a loan go up significantly, a business with weak cash flow could fail to pay those interest charges.

21
Q

When will gearing ratio be beneficial?

A

When the business had good cash flow / interest rates are low on loans - getting a loan will reduce the amount of finance needed from shareholders, retaining which may be cheaper than paying dividends

22
Q

When is a business considered to be highly geared?

A

When it has a gearing ratio of >50%

23
Q

When is a business considered to have low gearing?

A

When it has a gearing of <25%

24
Q

When is a business considered to have normal gearing?

A

When it has a gearing between 25% and 50%

25
Q

How can gearing be reduced?

A
  • improving profits
  • repaying long term loans
  • retaining profits rather than paying divedends
  • issuing more shares (dept free cash boost)
  • converting loans to some form of share capital
26
Q

How can the trading, profit and loss account help assess the competitiveness of of a business?

A
  • shows stakeholders how well the business is doing and if it’s making enough profit
  • helps determine if profits are sustainable over time
  • allows comparisons with competition and the overall industry
  • it helps lenders to see if the business has enough profit to stay afloat
  • helps company directors meet legs, reporting requirements
  • gives staff an idea of what they might earn if the company does well
27
Q

Who is a balance sheet important to?

A

Bankers, suppliers, investors, staff

28
Q

Why might a balance sheet be important to a banker?

A

They can look at a businesses long-term borrowing when considering any further finance options

29
Q

Why might a balance sheet be important to a suppliers?

A

They can look at the money the business owes and question why this might be if the business has plenty of cash and stock

30
Q

Why might a balance sheet be important to investors?

A

They can look at whether the business has plenty of cash (a current asset) and particularly the trend for cash over time. This will help to insulate the business from tough times in the future and ensure its liabilities remain within reasonable boundaries.

31
Q

Why might a balance sheet be important to staff?

A

They may want to look at the accumulated profit of the business and how this has been distributed in terms of or any profit-sharing scheme

32
Q

Why is it important to monitor business performance over multiple years?

A

To track financial health, see if cash and debt levels stay balanced, and ensure goals are met.

33
Q

What trends should businesses look for over time?

A

Look for changes in cash flow and debt to spot financial strengths and weaknesses.

34
Q

analyzing accounts help identify problems?

A

Comparing ratios across years can reveal issues, like rising debt or low cash, that need fixing.

35
Q

Why is tracking performance essential for strategic decisions?

A

It guides decisions to solve problems now and plan for growth in the future.

36
Q

Problems in using accounts to measure the performance of a business

A
  • Assets and liabilities can be recorded in numerous ways on a balance sheet, resulting in window dressing.
  • Accounts provide figures only, lacking context or explanations.
  • Past accounts are often unhelpful for new businesses expanding into new markets.
37
Q

Factors that can effect the accounts of a business

A
  • window dressing
  • changes in demand
  • inflation
38
Q

What is window dressing and why might businesses use it?

A

Presenting the accounts of a business in a way that enhances its financial position, can be done in order to hide a liquidity problem from investors or enhance profits so as to have a better chance of gaining finance

39
Q

How can changes in demand negatively affect accounts?

A

E.g if a product suddenly becomes successful, accounts may under
-report its liabilities (like extra material costs or borrowing money to meet high demand)

40
Q

What is inflation and how can it diminish the financial performance of a business?

A

Inflation is a sustained increase in the cost of living. It reduces the buying power of retained profits, making it harder to invest. Rising prices can increase costs for raw materials, leading to lower profit margins and potential financial strain on the business.

41
Q

If fixed assets fall on a balance sheet…

A

Sign that business is reducing in size

42
Q

If long term liabilities increase on a balance sheet…

A

Can lead to increased costs if interest rates rise in the future

43
Q

Long term liabilities falling on a balance sheet…

A
  • less susceptible for changes in interest rates
  • may indicate the business is not investing in growth
44
Q

Shareholder funds increasing on a balance sheet…

A

Sign that shareholders are investing more capital into the business - indicating healthy levels of profit

45
Q

If working capital is good on a balance sheet (more assets than liabilities)…

A

Suppliers are more willing to provide trade credit

46
Q

Why is having working capital important?

A

It shows the business can pay day-to-day running costs (liquidity)

Business (34 decks)

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