Finance Flashcards
What is Budget
A detailed plan of income and expenses expected over a certain period of time
What are the stages of a budget
-Cost- value of money that has been used to produce good or service
-Operating budget- the expenses and revenue generated from the day-to-day business operations of the company
Advantages of budgeting
- Budgets help businesses achieve targets and objectives.
- Budgets help managers and leaders focus on cost control which can increase profit.
- Budgets can be used to motivate staff by providing spending authority to individual departments and teams.
Disadvantages of Budgeting
- Inflexibility. A budget can be inflexible and may not allow for unexpected changes in circumstances
- Time-Consuming. Creating and monitoring a budget can be time-consuming and may take away from other important tasks.
- Unrealistic Targets.
What is Zero budgeting
Budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending
What is Variance Analysis
A method of assessing the difference between estimated budgets and actual numbers. It’s a quantitative method that helps to maintain better control over a business
What is Adverse Variance
Where actual income is less than budget, or actual expenditure is more than budget
What is Favorable Variance
Where actual income is more than budget, or actual expenditure is less than budget.
What is a cash flow forecast
A tool that is used by a company to help them understand where their organisations cash balances will be at certain points in the future
What are the components of a cash flow forecast
- Total inflows - include all cash inflows coming into the business during the period
- Total outflows - include all cash outflow leaving the business during the period
- Net cash - flow is the difference between total inflows and total outflows
Advantages of a cash flow forecast
- Anticipate cash shortages
- Helps plan for future growth
- Better cost control
Disadvantages of a cash flow forecast
- Unable to account for changing costs
- Requires some level of skill, only as good as the person who makes it
- Takes time away from other tasks such as running the business
How is total Cash Outflow calculated
By adding all its expenses during a period (month, quarter, year etc.)
What is Net Cash Flow
The difference between the money coming in (“inflows”) and the money going out of a company (“outflows”) over a specified period.
How is Net Cash Flow calculated
Total Cash Inflows - Total Cash Outflows
What is an Opening balance
The amount of money a business starts with at the beginning of the reporting period
What is a Closing Balance
The amount of money the business has at the end of the reporting period, usually the last day of the month
How is a closing balance calculated
Net Cash Flow + Opening balance
How can cash flow problems be solved
- Rescheduling payments
- Using an overdraft
- Cutting costs
- Finding new sources of cashflow
What is an income statement
A financial document that demonstrates the financial performance of a business based on its income and how this has changed over a period of time, usually 12 months
What is the layout for an income statement
- Revenue
- Cost of goods sold
- Gross profit
- Operating expenses
- Operating profit
- Net profit before & after tax
What is Cost of Sales
Represents the direct costs related to the manufacturing of goods/services that are sold to your customers
What is Gross Profit
The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services
Formula for gross profit
Revenue - Cost of goods sold
What is Net Profit
What is left after all the costs of a business have been taken from its sales revenue
Formula for Net profit
Gross Profit - Operating expenses and interest
What is the Gross profit margin
The profit after subtracting the cost of goods sold. A company’s gross profit margin is the money it makes after accounting for the cost of doing business
Formula for Gross profit margin
Gross Profit
_____________ X 100 = %
Revenue
What is the Net Profit margin
Measures how much net income or profit is generated as a percentage of revenue
Formula for Net Profit Calculation
Net Profit
______________ X 100 = %
Total Revenue
How can the Gross Profit Margin be improved
- Streamline your product offering. While all product lines may be profitable, it’s unlikely that all will yield the same margins
- Renegotiate with suppliers for better deals
- Upsell to existing clients
- Increase efficiency and productivity.
How can the Net profit margin be improved
- Increasing Revenue
- Reducing Costs
- Increasing Productivity
- Increasing efficiency
What is a Trading Account
Shows what the sales of the business have been and the direct costs of making those sales, known as the cost of sales
What is a Profit and Loss Account
An accounting statement showing a business’ sales revenue over a trading period and all the relevant costs incurred in earning that revenue
What is a Appropriation Account
Shows how companies and governments distribute their funds among partners, shareholders, and departments
