Assessing financial performance Flashcards
Introduction - Definition
Performance report takes the date within a performance report and analyses the data and comments on performance and where necessary makes suggestions on how to improve the business performance.
Higher marks available for comment than analysis
Exam approach
1. Identify exam requirements - Profitability, liquidity, Risk. Profitability is the main point for APM
2. What data have you been given? these could be
- Actual v past years - look at trend improving or worsening of
performance. All comments should be worded as “Doing better”
or “Doing worse” - give reasons for change in scenario. compare
company numbers with industry average
- Actual v competitor - you should comment on whether business
is doing better or worse than competitor and WHY they are.
The extent to which the competitor is different must be
highlighted where possible and financial effect of that
difference e.g. Region, product, mix of product
- Division 1 v Division 2 - compare internal performance and
comment which is doing better and WHY. These could be
genuine due to management or due to differences in divisions.
The differences include regions, products, wage levels, rent
levels, size of clients, degree of competition
3. Performing analysis and calculations
when given calculations already - how to select ratios to
comment about
significant figures - sales, major costs
- when ratios change or point of difference between business
and comparator
- Things that critical or CSF business drivers
when not given numbers -
- Calculate segmented totals - Net profit %, ROCE
Drill further using Revenue and expenses
- Trading account - Sales growth, price change%, sales
volume change, gross margin %
- Comment on sales numbers individually
- Cost change for fixed cost and cost to income ratio for
variable costs
- cost ratios training/salary
Sales growth, segmentalize
Sales growth is driven by volume and price, check movement between to see if strategy is price penetration or predatory pricing and comment on customer reaction.
Always segmentalize calculations where possible.
Commentary
This area covers the most marks - 80%
- Explain the reason for change in ratio e.gd Rev growth is driven by price and volume.
Volume could increase due to popular products, customer loyalty, less competition, PEST - This will be in the question.
You can hypothesise and come up with your opinions
- Consequences of the change in ratio for the business - looking forward what will be future going forward if things don’t change
- Ensure you use any external data given in the question
Solutions to issues raised - If required
Non financial information
Suggest a solution for each issue raised
e.g. Rent increase - can be solved by working from home, relocation, negotiation.
Non financial information is usually the underlying drivers of business performance. Financial info shows the end result whilst NFI tells you why.
Basics of liquidity and risk in APM -
operational gearing
cash is not profit
- Operational gearing - ratio between variable, fixed and total cost, the higher the fixed cost the higher the operational gearing
The higher the ratio the greater the risk to a business.
How to reduce operational gearing ( reduce fixed costs and increase variable costs)
1. Change salaried employees to freelancers
2. proper can be sold and rented instead
This reduces gearing but can increase the cost per day of the business.
Cash is not profit
1. fixed asset purchases decrease cash but depreciation phased into profit
2. provisions reduce profit but doesn’t affect cash
3. cash is needed for survival for investment and dividend
4. managers can be profit motivated and shareholders are cash motivated
NPV & IRR
NPV is surplus of cash expected from a project after allowing for all relevant cashflows and time value of money
positive NPV - accept project
The NPV in theory is a gain for shareholders
IRR is the breakeven cost of money
