Analysing Financial Performance Flashcards
What is a budget?
Budgets are financial plans that forecast revenue from sales and expected costs over a period of time.
What are the types of budgets?
Revenue or earnings budget - expected revenue from selling products, expected level of sales and selling price. Easier for an existing business than start up, why?
Expenditure budget - cost or production budget, plan spending on labour, raw materials, fuel and other items essential for the production process
Profit budget - using revenue and costs can calculate expected profit. Important information for stakeholders
Benefits of budgets?
Setting budgets helps the business achieve its financial and wider objectives. If a business has growth in sales as a major objective, the budgets will reflect this, with higher revenues being forecast but also higher costs of production planned.
Budgets are difficult to make accurate as lots of research is needed. What needs to be done?
Analysing the market to predict likely trends in sales and prices to help forecast revenue
Researching costs for labour, fuel and raw materials by contacting suppliers and seeing if they can negotiate price reductions for prompt payment or ordering in bulk
Considering government estimates for wage rises and inflation, then incorporating them into future sales revenue and expenditure budgets
Sources of information for budgets:
Previous trading records
Market research - predict likely sales
Suppliers
Government agencies
Difficulties in constructing budgets:
Difficult to accurately forecast sales - tastes and preferences
The risk of unexpected changes - external environment
Decisions by governments and other public bodies - publishing of the budget
What affects Favourable variances
Wage rises lower than expected
Economic boom leads to higher than expected sales
Rising value of pound makes imported raw materials cheaper
Poor forecasting
Inexperience
What affects Adverse variances
Adverse variances
Fuel prices increase as oil price rises
Government increases business rates by an unexpected amount
Competitors introduce new products winning extra sales
Poor forecasting
Inexperience
Advantages of budgeting:
Control finance effectively
Enable managers to make informed and focused decisions
Production budgets ensures that a business doesn’t overspend
Can allocate finances where needed
Used to motivate staff
Revenue budget used as a target
Advantages of budgeting:
Control finance effectively
Enable managers to make informed and focused decisions
Production budgets ensures that a business doesn’t overspend
Can allocate finances where needed
Used to motivate staff
Revenue budget used as a target
Disadvantages of budgeting:
If employees are delegated responsibility then they will need to be trained, which could be costly
Teething problems, errors or delays as employees adjust to the position
Allocating budgets fairly and in the best interest of the business can be difficult
Budgets are normally within the current financial year - so may try and stay within budget which may not be in the longer term interest of the business
What is cash flow
Cash flow is the movement of cash into and out of a business over a period of time
Why do we use cash flow forecasts?
Support applications for loans - banks and other financial lenders more likely to lend to a business that has done some financial planning which gives them more confidence the repayments will be met
Avoid unexpected cash flow issues - forecasting to see when additional cash will be needed so that solutions can be found to keep a business functioning
What are payables and receivables?
Payables is the amount of time taken by a business to pay its suppliers and other creditors
Receivables is the amount of time taken by debtors (businesses customers) to pay for the products that has been supplied
Break even analysis advantages:
Forecast the effect of varying numbers of customers on revenue, costs and profit
Implications of changes in price or costs on profitability
Simple technique - particularly suitable for start up businesses and businesses that produce a single product
Quick
Used to gain additional finance - financial planning
