5.2 financial performance

what are budgets

targets for future finances of a business as a whole or for individual departments

income budget

a target set for the amount of revenue to be achieved in a set time period

targets can be made from sales forecasts and market research

expenditure budget

a limit places on the amount to be spent in a time period

profit budget

a target set for the surplus between income and expenditure in a given period of time

income budget - expenditure budget

variances

any difference between the budget and the actual is a variance

this helps to monitor performance

budget = 50

actual = 52

variance = 2

adverse variance

bad

expenditure is higher than the budget

income is lower than the budget

profit is lower than the budget

favourable

good

expenditure is lower than the budget

income is higher than the budget

profit is higher than the budget

ADV of budgeting

• provides a target

• informs decision making

• motivates budget holders due to increased responsibility

DIS of budgeting

• conflict between departments on expenditure budget size

• expenditure opportunities may come up

• budget maybe to easy or hard to achieve

• time to consult and monitor

break even point

total revenue = total cost

profit/loss = 0

margin of safety

current output - break even output

break even output

fixed costs / contribution per unit

ADV of break even

• foresee if a venture is worth doing

• can calculate profit or loss at different output levels

• can predict outcome of changing variables

• integral part of business plan when securing a source of finance (loan)

DIS of break even

• based on predicted costs and revenues

• ignores changes in variable costs or selling price

• not useful when the business sells multiple products

unit contribution

selling price - variable cost per unit

total contribution

contribution per unit x units sold

or

sales revue - total variable costs