Topic 3.5.2 - Analysing financial performance Flashcards
How to construct a budget
- make a judgement of sales revenue
- set costs budget
- break down costs to departmental level
- further break down costs
How to construct a cash flow forecast
- cash in
- cash out
- cash flow
- monthly balance
- opening and closing balance
How to analyse budgets
- adverse
- favourable
How to analyse cash flow forecasts
- calculate different in opening and closing balance
- using monthly closing balance to analyse trends
- analyse the timings of cash inflows and outflows
The value of budgeting
- allows management of cash outflows and therefore the ensures of profit
- set targets and priorities
- turn objectives in practical reality
- provide direction and coordination
- assign responsibilities
- allocate resources
- communicate targets
- delegate without losing control
- motivate
- forecast
- monitor performance
- control income and expenditure
Change in price on break even graph
Price increases - Revenue line starts in the same place but steeper
Price decreases - Revenue line starts in the same place but shallower
Change in fixed costs on break even chart
Fixed costs rise - costs line starts higher but with same gradient
Fixed costs fall - costs line starts lower but with same gradient
Change in variable costs on break even chart
Rise in variable costs - Steeper total costs line and variable costs line
Fall in variable costs - Shallower total costs line and variable costs line
Benefits of a break even chart
- estimate level of output needed to allow them to reach profit levels
- assess changed in the economic environment on break even
- take decisions on whether to produce their own products or outsource
- allows them to judge if start-up is profitable
Negatives of a break even chart
- model is a simplification
- assumes all stock is sold at the same price
- assumes all output is sold
Gross profit
Revenue - cost of sales
Interpreting gross profit margin
- trends
- a fall indicated higher supplier costs or lower sales price
- increase reflects better buying from suppliers or selling price rises
Operating profit
revenue - cost of goods - operating costs
Interpret operating profit margin
- trends
- fall might suggest higher operating costs or a fall in gross profits
- increase represents better control of operating costs
Profit of the year
- holistic view of business performance
- most accurate and representative percentage
Payables
Amount owed by a business to suppliers
Receivables
Amount owed to a business by customers
Use of data for financial decision making and planning
Allows more accurate decisions to be made
Allows low skill managers to make decisions
Allows to see if decision is profitable
Debt factoring
Way of raising cash by selling their sales invoices to a third party at a discount
- short term
Benefits of debt factoring
- receivables turned quickly to cash
- business can focus on selling not collecting
Drawbacks of debt factoring
- quite a high cost
- customers may feel their relationship with the business has changed
Overdraft
Allows bank balance to go below 0
- short term
Benefits of bank overdraft
- easy to arrange
- flexible
- interest only paid on amount borrowed
Drawbacks of overdraft
- cash can be withdrawn at short notice
- interest charges varies
- higher interest rate
Bank loan
Where a bank lends a certain amount of money
- medium term
Advantages of bank loans
- greater certainty of funding
- lower interest rates than overdraft
- finances fixed assets
Drawbacks of bank loan
- requires security
- interest paid on full amount
- harder to arrange
- start-ups and small business excluded
