Workbook 9: Financial Management

• A budget is a financial plan for the future concerning the revenues and costs of a business
• Variance analysis calculates the difference between actual results and the budget
• A favourable variance is a positive difference between budgeted figures and actual figures. e.g. costs lower than expected or revenue higher than expected
• An unfavourable variance is an adverse difference between budgeted figures and actual figures. e.g. costs higher than expected or revenue lower than expected
• Gross profit is the profit made after deducting the cost of sales from the sales revenue.
• Gross profit = sales revenue - cost of sales
• Operating profit is the profit made by a company after deducting all the overheads of running the business.
• Operating profit = gross profit - overheads
• A revenue budget forecasts expected revenues and sales
• An expenditure budget shows the expected costs based on sales budget
• A profit budget is based on the combined sales and expenditure budgets
• Profit is the reward/return for taking risks or making investments
• A profit margin is the percentage of sales that a business keeps after deducting all its costs.
• Profit of the year is the profit left after tax has been accounted for
• Ratio analysis is used to analyse relationships between financial data to assess the performance of a business
• Gross profit margin (%) = Gross profit/Revenues x 100
• Operating profit margin (%) = Operating profit/Revenue x 100
• Liquidity is a company's ability to convert assets to cash or acquire cash (through a loan or money in the bank) to pay its short-term obligations or liabilities
• Cash flow management is a crucial day-to-day activity for every business
• Excess stock is where a business holds a higher quantity of goods or products than what is necessary to meet customer demand.
• Overtrading is when a business expands too quickly without having adequate cash resources
• Trade debtors are Individuals or organisations who owe the business money on a credit basis
• Seasonal demand refers to fluctuations in sales volume related to the seasonal changes in the economy.
• Working capital is the amount of money that a business has available to conduct its day-to-day activities
• Payables is the amount of money owed to a supplier or creditor by a business