Unit 5.2- Analysing financial performance notes

Question 1

What is a budget?

Answer 1

financial plans that forecast revenue from sales and expected costs over a period of time.

Question 2

What are types of budgets?

Answer 2

• Revenue or earnings budget - expected revenue from selling products, expected level of sales and selling price. -Easier for an existing business than start up,
• Expenditure budget - cost or production budget, plan spending on labour, raw materials, fuel and other items essential for the production process
• Profit budget - using revenue and costs can calculate expected profit.

Question 3

Sources of information for budgets

Answer 3

• Previous trading records
• Market research - predict likely sales
• Suppliers
• Government agencies

Question 4

What are the difficulties in constructing budgets?

Answer 4

• Difficult to accurately forecast sales - tastes and preferences
• The risk of unexpected changes - external environment
• Decisions by governments and other public bodies - publishing of the budget

Question 5

What are Advantages of budgets?

Answer 5

Control finance effectively
Enable managers to make informed and focused decisions
Production budgets ensures that a business doesn’t overspend
Can allocate finances where needed
Used to motivate staff
Revenue budget used as a target

Question 6

What are disadvantages of budgeting?

Answer 6

• If employees are delegated responsibility then they will need to be trained, which could be costly
• Errors or delays as employees adjust to the position
• Allocating budgets fairly and in the best interest of the business can be difficult
• Budgets are normally within the current financial year

Question 7

What are the reasons for a cash flow forecast?

Answer 7

• Support applications for loans

- Avoid unexpected cash flow issues

Question 8

What are payables and receivables?

Answer 8

• Payables is the amount of time taken by a business to pay its suppliers and other creditors
• Receivables is the amount of time taken by debtors (businesses customers) to pay for the products that has been supplied

Question 9

What are Break even analysis advantages?

Answer 9

• Forecast the effect of varying numbers of customers on revenue, costs and profit
• Implications of changes in price or costs on profitability
• Simple technique - particularly suitable for start up businesses and businesses that produce a single product
• Quick
• Used to gain additional finance

Question 10

What are Break even analysis disadvantages?

Answer 10

• A prediction - information may be inaccurate
  Simplification of what happens - businesses don’t usually stick to a single price
• More difficult if a business sells numerous products
• Costs do not rise as steadily as suggested - economies of scale.