Finance

this topic will cover budgets, income statements, cash flow forecasts as well as ratios

Budgets definition

Financial plans for the future over a specific period of time that describes the expected levels of expenditure and revenues.

Budgetary control definition

Means that budgets for revenue and expenditure are planned ahead of time and compare it to actual results to identify variances.

Variance analysis definition

The process of calculating and interpreting any differences between budgeted figures and actual figures.

Favorable variances definition

Have a positive impact on profit and is therefore seen as good for the business. e.g. spending less than budgeted or receiving more than budgeted in income.

Adverse variances definition

Have a negative impact on profit and therefore is seen as bad for the business. e.g. spending more than budgeted on expenditure or receiving less than budgeted in income.

Causes of variances

actions of competitors, action of suppliers, changes in the economy, internal inefficiency, internal decision making.

Uses of budgets

Can measure performance against targets, helps with planning and informed decision making, can act as a motivator.

Difficulties of budgeting

Time consuming, can be too rigid, successful budget is dependent upon acuate data.

Cash flow definition

Describes the movement of cash in and out of the business over a specific period.

Cash inflows definition

All the money that comes into the business, which can be broken down into various categories such as sales revenue, investments, and loan proceeds.

Cash outflows definition

Any money leaving the business in order to cover it’s expenses or payments such as raw materials, stock, rent and other overheads,

Cash flow forecast definition

A financial document that predicts all expected receipts and expenses of a business over a specific period of time and shows the expected balance at the end of each month.

Opening balance definition

The amount of cash a business has at the beginning of each month. this can be found on the closing balance of the previous month.

Net cash flow definition and formula

The difference between the total cash inflows and total cash outflows.

Net cash flow = cash inflows - cash outflows

Closing balance definition and formula

The amount of cash a business has at the end of each month.

Closing balance = opening balance + net cash flow

What if scenarios definition

Hypothetical situations analysed, such as an increase in revenue, to assess the potential impacts of different decisions or events on financial outcomes.

What affects a cashflow

Transaction types, timings of cashflow, nature of business.

How to improve cash inflow

Increase volume of cash coming in, or speed up cash inflows.

How to improve cash outflow

Decrease the volume of cash leaving the business, or slow down cash outflows.

Income statement definition

Shows whether a business has made a profit or loss during a certain period of trading, usually at the end of the trading year.

Cost of sales definition and formula

The direct costs involved in earning sales revenue e.g. labour, raw materials or stock.

Cost of sales = opening inventory + purchases - closing inventory

Gross profit definition and formula

The amount remaining from sales revenue after deducting the cost of goods sold. It reflects the efficiency of production and pricing strategy.

Gross profit = sales revenue - Cost of sales

Net profit definition and formula

The difference between gross profit and expenses e.g. machinery costs, marketing costs. this represents the actual profit that remains after all costs have been deducted from revenue.

Net profit = Gross profit - Expenses

Gross profit margin definition

The ratio of gross profit to sales revenue, expressed as a percentage. It indicates how well a company controls its production costs relative to its sales.

GPM = (Gross profit / Sales revenue) x 100

Net profit margin definition and formula

The ratio of net profit to total sales revenue, expressed as a percentage. It measures how much of each pound earned translates into profit after all expenses are accounted for.

NPM = (Net profit / Total sales revenue) x 100