Analysing Financial Performance Flashcards
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
What are some sources of information for budgets?
Previous trading records
Market research - predict likely sales
Suppliers
Government agencies
What are some difficulties 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 is a favourable budget?
When the cost is lower than the budget
What is an adverse budget?
When the cost is greater than the budget
What are some advantages of budgets?
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
What are some disadvantages of budgets?
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 are payables?
Payables is the amount of time taken by a business to pay its suppliers and other creditors
What are receivables?
Receivables is the amount of time taken by debtors (businesses customers) to pay for the products that has been supplied
What are some advantages of break even?
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
What are some disadvantages of break even?
A prediction - information may be inaccurate
Simplification of what happens - businesses don’t usually stick to a single price
More difficult if a business sells numerous products
Costs do not rise as steadily as suggested - economies of scale
What is a profit margin?
Compares a business’s profit to its sales revenue expressed as a percentage
How do you calculate contribution?
Total Revenue - COGS / Total Revenue
How to you work out break even?
FC / Contribution
