Chapter 19: financial performance Flashcards
Adverse variance
Actual profit is lower than budgeted profit
Due to costs being higher than targeted
Assets
Items of value
Eg. Land / machinery /. Cash
Balance sheet
Statement of an organisation assets and liabilities at one point
Shows value of the company
Break even output
Quantity of output where total revenue = total costs
Budget
Financial plan
States futures expected costs and revenue
Budgeting
Making a budget
Or trying to keep below a certain level of spending
Capital expenditure
Spending on new non-current assets
Capital structure
Way a business raises finance to purchase assets
How much from shares vs loans
Capital structure objectives
Raising finance in a cheap way
Provides sufficient funds for survival / expansion
Contribution
Money left over from sale of product after variable costs are deducted
Used to pay of fixed costs
Contribution per unit
Price - variable cost per unit
Current assets
Items of value owned by a business. That will be turned to cash within 1 year
Current liability
Debts scheduled for repayment within 1 year
Current ratio
Measurement of the level of liquidity
Should be 1;5;1
Current ratio formula
Current asset/current liabilities
Debt factoring
Business sells its receivables to a third party at a discount
Direct cost s
Cost of sales
Includes raw materials. Direct labour
External source of finance
Funding from outside of the business
Eg. Bank loan
Favorable variance
Situation where the financial outcome is better than budgeted for
Financial decision making
Strategies chosen to help improve cash flow
Financial efficiency ratio
Measuring how well an organisation mangers its working capital
Financial objectives
Monetary goals that a business sets itself usually set target in Caltrain time
Gearing
Measure of the extent to which a firms capital is financed using long term loans
Gearing formula
Non-current liabilities / total equity + non current liabilities X100
Going into administration
Court appoints accountants to run a business after its declared insolvent
Gross profit
Excess of revenue over cost of sales
= revenue - direct costs
Income statement
Account that shows income and expenditure of a firm over a set Time span
Insolvent
Company with little hope of ever being able to pay debts
Internal source of finance
Funding that comes from the business owners
Inventory
Stocks of raw materials
Inventory turnover
Ratio that shows how many times a business sell its stock in a year
Inventory turnover formula
Cost of goods sold / average inventories held
Liabilities
Debts owed
Eg. Trade credit
Liquidation
Turning all assets into cash and paying off liabilities
Liquidity
Ability of a firm to meet it short term debts
Loan
Sum of money that are borrowed an paid back with interest
Long term funding
Finance raised that does not have to be repaid within 1 year
Margin of safety
Quantity by which sales may fall before a form incurs a loss
= demand - break even output
Net assets
Shows value of company
= total assets - total liabilities
Net current assets
Amount of spare liquid assets once current liabilities have been taken into account
= current assets - current liabilities
Operating profit
Profit generated by the ongoing business
= gross profit - indirect costs
Operating profit margin
% of sales revenue that is operating profit
= operating profit x 100 / sales
Overdraft
Borrowing facility in which any amount of money to a agreed limit can be used
Over head
Costs not generated by production process
Over trading
Beyond level at which there is a safe level of cash
Risk of liquidation despite strong sales
Payables
Debts owed by a business
Payables days
= payables / cost of sales X 365
Profit for the year
Total profit
= operating profit + interest received - interest paid - tax on profits
Profit for the year margin
% of revenue that is profit for the year
= profit for year / turnover x 100
Profitability
Compares business profit to other factors like revenue or capital employed
Receivables
Amount owing to a firm from debtors
Current asset
Receivables days
Number of days till convert receivables to cash
= receivables/revenue x 365
Retained profits
Value of all profits not given to shareholders and kept for company use
Return on capital employed
= operating profit / total equity + non current liabilities. X 100
Return on investment %
Return on investment / cost of investment x100
Share capital
Amount of money invested into the business by shareholders
Total contribution
Total revenue - total variable costs
Total equity
Money belonging to the shareholders
= share capital + retained profit
Variance
= actual figue - budgeted figure
Venture capital
Investment funding for small businesses which is taking risks
Window dressing
Presenting the accounts in a way that make the accounts look better
Working capital
= current assets — current liabilities
