Chapter 1.4 Flashcards
Interpretation of financial budgets and cost models for the control of purchases
Financial Budget
A plan for a defined period, usually twelve months, showing either revenues or costs, or both
Cash flow
The amount of money going into and out of a business
Financial Ratios
Analysis using data from financial statements to identify and monitor trends in performance, for example, profitability, liquidity and debt
Return on Investment (ROI)
A measure of profitability that indicates whether a gain or loss has been generated compared with the initial cost
Return on capital employed
A financial ratio which identifies a business’s ability to generate profit from the capital used
Net present value (NPV)
An accounting term for an amount in the future adjusted to today’s value by a calculation
Define financial modelling
Where an organisation uses historical and assumed financial, accounting and business metrics, such as costs and revenue, to project and abstract forecast of the future state of the company
What is financial modelling used for?
To forecast an organisations future financial performance
Describe financial models
Usually simple spreadsheets that can be used to forecast an organisations future financial performance
What can organisations use to assess the viability of a business case?
Financial ratios, specifically investment ratios
Define investment ratios
Types of financial ratios that can be used to assess an organisations ability to generate a positive and profitable return
Name 4 examples of financial ratios
- Return on investment
- Return on capital employed
- Profitability ratios
- Liquidity rations
What should organisations consider net present value for?
Any investment decisions associated with the business case
What does NPV assess?
The value of a project or investment over time, but with any projected future cash flows converted into the present value
What does NPV enable the visibility of?
The financial viability of the business case over multiple time periods
What can financial budgets be created from?
Financial modelling
What are financial budgets created to show?
The target cost and revenues over a certain time period
What wouldn’t an organisation know without financial budgets? (2)
- Whether it will have the funds to meet obligations
- Whether there will be sufficient surplus finds to reinvest in the business
Name the 3 main activities that are involved in budgeting and managing those budgets
- Planning
- Controlling
- Decision-making
What does it mean to control a budget?
Gathering and analysing data to show how money is being spent against the budget
Name a common way to see how managing a budget should work
Use a cycle of activities called the Plan-Do-Review cycle
Create an overview of the Plan-do-review cycle
- Plan - develop budget based on the business case approved
- Do - monitor variances and take action
- Review - evaluate budget performance and re-plan
Name 2 things required to prepare and manage budgets effectively
- Understand what cost entries apply to the budget
- How and when these affect the organisations cash-flow
Cost model
A process designed to assess and calculate all costs associated with producing or delivering a product or service and arrive at a provable end cost
What’s the overall aim of a cost model
Accurately access all financial information on the resources required to deliver a product or service and transform the data to set a realistic end price for the consumer