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
