analysis of Financial performance report

The Presentation

On Analysis

Of Financial

Performance Analysis Report

Mitesh chaudhari 64

Neha kumari 65

Aditya mehta 66

Ketan rathod 67

Mithil tanna 68

Neha parmar 69

Nirav nathvani 70

Nitin pandya 71

Paresh sojitra 72

Ashish bhalu 73

Divyapalsinh rana 74

Laxman maida 75

Nirav chavda 76

Group Members

What is Financial Performance Report?

One of the most fundamental facts about businesses is that the operating performance of the firm shapes its financial structure.

Financial performance can be evaluated using the parameters return on capital employed and net profit percentage.

DEFINITION

A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

There are many different ways to measure financial performance, but all measures should be taken in aggregation. Line items such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt.

WHY THE FINANCIAL PERFOMANCE IS IMPORTANT

It is very important to monitor a wide range of “performance indicators” in your business, in order to ensure that appropriate and timely decisions and plans can be made.

Given that sales, profit margins and cash flow are the lifeblood of any business, owners should place particular emphasis on receiving regular reports on these areas of the business.

Knowing the financial position becomes even more important as the business grows, especially if your plan is to grow the business substantially.

Lack of a precise and timely knowledge of the current financial position can lead to business failure and have other consequences for the directors/owners.

VARIANCE

DefinitionIt is difference between the actual and

budgeted data of finance which are calculated for business unit.

Most companies make a monthly analysis of the differences between actual and budgeted revenues and expenses for each business unit and for the whole organisation.

VARIANCE ANALYSIS DISAGGREGATION

Tota

l var

ianc

eNon manufacturing

costs

Administration

Marketing

R&D

Manufacturing costs

Variable Cost

Material

Direct Labor

Variable overheadFixed cost

Sales

Volume

Market share

Industry volume

Selling price

REVENUE VARIANCE

In this we come to know how to calculate selling price, volume & mix variances.

Calculation is made for each product line, and the product line results are then aggregated to calculate the total variance.

Positive variance is favorable & negative variance is unfavorable.

TYPES OF REVENUE VARIANCE

1) Selling price variance

2) Mix & volume variance

3) Mix variance

4) Volume Variance

1) Selling price variance:-

It is calculated by multiplying the difference between the actual and the standard price by the actual volume.

2) Mix and volume variance:-

Mix and volume variance are not separated the equation for it is.

mix & volume variance =(Actual volume – budgeted volume)* budgeted unit contribution

3)Mix Variance :-

Mix variance for each product is calculated as follows:-

Mix variance =[ (Actual volume of sales)- (total actual volume of sales* budgeted proportion)*budgeted unit contribution]

4)Volume variance:-

It is calculated by subtracting the mix variance from the combined mix and volume variance.

Volume variance= [(total actual volume of sales)*(budgeted percentage)-(budgeted sales)]*(budged unit contribution)

EXPENSE VARIANCE

Fixed cost variance :-

Variance between actual and budgeted fixed cost are obtained simply by subtraction , since these costs are not affected by either the volume of sales or volume of production.

Variable variance:-

It is the cost that vary directly and proportionately with volume. The budgeted variable manufacturing cost must be adjusted to the actual volume of production.

VARIATIONS IN PRACTICE

It is complicated to find straightforward way of identifying the variances that cause actual profit in business unit to be different from the budgeted profitability.

For Eg:-

Particulars Amount

Actual Profit $132

Budgeted Profit $80

Variance $52

Particulars Amounts

Revenue variances

-Price $(75)

-Mix $35

-Volume $115

Net Revenue variance $75

Variable cost variance

-Material $(11)

-Labor $(12)

Variable Overhead $10

Net variable cost variance $(13)

Fixed cost variance

-selling Expense $(5)

-Administrative expense $(5)

Net fixed cost variances $(10)

Variance $(52)

Time period of comparison.

Focus on gross margin.

EVALUATION OF STANDARDS

In MCS the formal standards used in the evaluation of reports on actual activities are of three types :-

1) Predetermined standards or budgets

2) Historical Standards

3)External standards

PREDETERMINED STANDARDS

If carefully prepared and coordinated these are excellent standards.

It’s the basis against which actual performance is compared in many companies.

However if budget numbers are collected in haphazard manner, then they don’t provide reliable data for comparison.

HISTORICAL STANDARDS

These are records of past actual performances.

Results for the current month may be compared with the results for the last month or with the same month a year ago.

This type of standards has two serious weaknesses :-

1) conditions may have changed between the two

periods in a way that invalidates the comparison

2) The prior periods performance may not have

been acceptable.

Despite these inherent weaknesses it is used in some companies.

EXTERNAL STANDARDES

These are standards derived from the performance of other responsibility centers or of other companies in the same industry

The performance of one branch sales office may be compared with the performance of other Branch sales offices.

If condition of the responsibility centers are similar , such comparison provides an acceptable basis for evaluating performances.

LIMITATION OF STANDARDS

A variance between actual and standard performance is meaningful only if it is derived from a valid standard.

Even a standard cost may not be an accurate estimate of what cost should have been under the circumstances.

This situation arises due to two reasons :-

1) The standards are not set properly.

2) Although it was set properly in existing condition, changed condition have made standard obsolete.

FULL COST SYSTEM

If company has full cost system, both variable & fixed overhead cost are included in the inventory at the standard per unit.

If the ending inventory is higher than the beginning inventory , some fixed overhead costs incurred in the period remain in inventory rather then flowing through to cost of sales and vice versa.

If a company has a variable cost system, fixed production costs are not included in inventory , so there is no production volume variance.

The fixed production expense variance is simply the difference between the budgeted amount and actual amount.

In this the production variance should be associated with production volume, not sales volume.

AMOUNT OF DETAIL

At each level variances are analyzed by individual products.

The process of going from one level to another is referred to as “peeling the onion”. i.e, successive layers are peeled off, and the process continues as long as the additional details is judged to b worthwhile.

The layers corresponds to the hierarchy of responsibility centers. Taking actions bases on the reported variance is not possible unless they can be associated with the managers responsible for them.

With modern information technology, about any level of details can be supplied quickly and at reasonable cost. The problem is to decide how much is worthwhile.

LIMITATIONS OF VARIANCE ANALYSIS

1. It identifies where a variance occurs, it does not tell why the Variance occurred or what is being done about it.

2. Variance analysis is to decide whether a variance is significant.

3. Performance report became more highly aggregated offsetting variances might mislead the reader

4. The report only shows what has happened. They do not show the future effect of the actions that the manager has taken.

CONCLUSION

Business unit managers their financial performances to senior management regularly usually monthly. The formal report consist of a comparison of actual revenue and cost with budgeted amounts. The differences , or variances , between these two amounts can be analyzed at several levels of details. This analysis identifies the causes of the variance form budgeted profit and the amount attributable to each cause.