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Financial analysis - budget and ratios (budgets is good for (control…
Financial analysis - budget and ratios
a budget is a short term business plan
a way of converting strategic objectives into actions
review and control of budgets - are we on track ?
mission
objectives
plans - typically 5 years
budgets - typically 1 year
budgets is good for
control (comparison to last years results)
motivation & focus
coordination
promote forward thinking
system of authorisation (manager does not have to approve everything)
Budgets
Master budgets
Budgeted Income statement (profit for the month)
good for considering profitability
includes depreciation
Budgeted statement of financial position
Important budget for master budgets
cash budget
tradepayables / trade receivables = closing balance
considers timing of payments -
good for consindering liquidity
does not include depreciation
Sales budget -
is typically the limiting factor of the organisation
other important budgetting figures - non financial
inventory turnover
days payable
days receivable
customer satisfaction
management by exception - managing things not going well
flexing budget and budget/variance analysis
annual reports and ratios
annual reports
income statement
cash flow statement
statement of financial position
Ratios can be used for benchmarking in relation to
past periods, similar business, planned performance
ratios
Liquidity
Liquidity ratios examine the relationship between liquid resources and amounts due for payment in the near future.
Financial gearing
Gearing ratios help to reveal the extent to which loan finance is employed and the consequent effect on the level of risk borne by a business.
Investment ratios
ROI
Efficiency
average inventories’ turnover period ratio;
average settlement period for trade receivables ratio;
average settlement period for trade payables ratio;
sales revenue to capital employed ratio; and
sales revenue per employee ratio
Profitability
ROCE = operating profit / long term capital employed
Costing approaches
Full costing
pricing
assessing relative efficiency
direct + share of indirect costs included in unit price
exercise control
Full costing
Traditional way
Overheads - indirect costs are assigned on hourly or machine hour basis
ABC
Overheads are charged to relevant products
Marginal analysis
Consider only variable costs
scarce ressources
making decisions to enter contracts
consider only future relevant costs
make or buy decisions