Analysing Financial Performances

What is a cash-flow forecast used for?

Estimate total cash inflows and outflows for a future period of time.

What are total inflows in a cash-flow forecast?

All cash inflows coming into the business during the period.

What are total outflows in a cash-flow forecast?

All cash outflows leaving the business during the period.

What is net cash flow?

The difference between total cash inflows and total cash outflows.

What is the opening balance in cash-flow forecasting?

The balance at the start of the month, which is the same as the closing balance of the previous month.

What issue can profitable businesses face if they have cash-flow problems?

They can become bankrupt due to lack of short-term cash to pay short-term debts.

What is a receivable in cash-flow management?

Money owed to the business.

How can businesses improve their cash-flow regarding receivables?

Reducing the trade credit period to increase the speed of receiving receivables.

What is a debtor in cash-flow management?

Money owed by the business to others.

How can businesses improve their cash-flow regarding payables?

By asking others for longer trade credit to delay the payment for payables.

What can businesses forecast using budgets?

Revenue, expenditure, and profit during a period.

What does a revenue budget do?

Forecasts expected revenues during a period.

What is favorable variance in revenue budgeting?

When actual revenue is higher than the forecast.

What is adverse variance in revenue budgeting?

When actual revenue is less than the forecast.

What does an expenditure budget do?

Forecasts expected costs during a period.

What is adverse variance in expenditure budgeting?

When actual costs are higher than the forecast.

What is favorable variance in expenditure budgeting?

When actual costs are lower than the forecast.

How is a profit budget created?

Using revenue and expenditure budgets.

What is a favorable variance in profit budgeting?

When overall profit is higher than forecast.

What is an adverse variance in profit budgeting?

When overall profit is lower than forecast.

What are advantages of budgeting for businesses?

Helps achieve targets, focus on cost control, and motivate staff.

What is breakeven analysis used for?

Predict the output level at which total costs and total revenues are the same.

What is contribution per unit?

Amount of revenue that contributes to covering fixed costs after variable costs per unit have been deducted.

How is contribution per unit calculated?

Selling price per unit - variable costs per unit.

What is total contribution?

The revenue from all product sales contributing to fixed costs after deducting total variable costs.

How is total contribution calculated?

Total revenue minus total variable costs.

What is gross profit?

The amount of profit remaining once direct costs (cost of sales) have been paid.

How is gross profit margin calculated?

(Gross profit ÷ Sales revenue) × 100.

What does operating profit represent?

Profit remaining once both direct and indirect costs have been paid.

How is operating profit margin calculated?

(Operating profit ÷ Sales revenue) × 100.

What is profit for the year?

The profit remaining once all costs and financing fees have been considered.

How is profit for the year margin calculated?

(Profit for the year ÷ Sales revenue) × 100.