Analysing financial performance

Budgeting

Financial plans for the future over a given time period which describes the expected levels of income and expenditure

Advantages of budgeting

Acts as a review

Clear targets

Controls income and expenditure

Disadvantages of budgeting

Time consuming

Poor motivation

Poor decision making

Balance sheet

A financial statement of a businesses assets and liabilities in a given time period

Liquidity

A measure of a businesses ability to pay of its short term liabilities

How quick they can turn assets into cash - stock, debtors, cash

Current ratio

A businesses assets being converted to cash to pay off liabilities

Current asset/current liabilities

Acid test ratio

A businesses ability pay of liabilities without selling stock to get cash

Current asset-inventory/ current liabilities

Liquid assets

Cash and cash receivables

Gearing ratio

A measure of how much capital is from borrowing vs own funds

Non current liabilities/ total equity+non current liabilities x100

ROCE

a measure of a businesses efficiency with capital employed

Operating profit/ total equity+ non current liabilities x100

ROCE higher than interest -less being borrowed

ROCE lower than interest - more being borrowed

Depreciation

Value of something then vs now

Original cost of asset- residual value/life of asset (yrs)

Income statement

A financial document which summarises a businesses trading activities and expenses to show if they have made a profit or a loss

Profit

An absolute figure represented in currency

Profitability

A measure of profit as a percentage

Improving profit

Same selling price

Increase gross profit

Change supplier for cheaper raw materials

Same quantity sold

Higher selling price

Internal promotion

Selling more at current price

Advertising

Window dressing

Manipulation of financial accounts by a business to improve appearance of performance

Why window dress

Improve share price

Reduce tax bill

Achieve rewards

Encourages rescue take over