Chapter 13 Flashcards
What is a budget
A short term plan (usually 1 year) expressed in financial terms
What are 5 benefits of budgets
Promotes forward thinking
Helps identify linked parts of the business
Sets targets and motivates performance
Provides a basis of control
Provides a system of authorization
Why does focusing on financial performance measures have limitations (5)
Encouragement of short termism - cutting costs short term may lead to issues in the future
Ignores strategic goals
Cant control people without budget responsibility - if they have nothing to do with finance
Historic measures: financial measures are lagging indicators
Distortability: financial measures can be manipulated through the use of creative accounting
What are the 4 categories on the balanced scorecard
Financial perspective - how do we look to shareholders
Customer perspective - how do customers see us?
Internal business perspective - ‘process’ - what must we excel at
Innovation and learning - ‘people’ - can we continue to improve
What is the vertical vector
How can you break it down
Related to how the 4 BSC perspectives are linked -
Innovation and learning - people
Internal business - process
Customer - customer
Finance - financial
If you get the first perspective right, it will feed down the chain and lead to good outcomes at the end
How can you measure performance of a NFP organization
3Es
Economy * efficiency = effectiveness
Economy ‘doing things cheap’
Efficiency ‘doing things well’
Effectiveness ‘doing the right things’
What is the equation for inventory days
(Inventories/ cost of sales)* 365
What is the equation for receivables days
(Trade receivables / revenue) * 365
What is the equation for trade payables days
(Trade payables/ credit purchases or cost of sales) * 365
What is the equation for the current ratio
Current assets / current liabs
What is the equation for gearing
Net debt / equity
Where net debt is debt less cash owned
What is the equation for interest cover
EBIT / interest
How do you calculate ROCE
Profit for the period/ average capital employed during the period
How do you calculate residual income
How is it better/worse than ROCE
RI = divisional profit - (net assets or division* required rate of return)
Theoretically superior
Conceptually more complicated
Can’t easily compare differently sized divisions
