3.5 - Decision Making To Improve Financial Performance

Question 1

Financial considerations

Answer 1

• seasonal
• competitive prices
• packaging
• CSR
• ingredients
• logistics
• retailer
• value added tax
• profit margins
• shareholders
• manufactures budgets
• wages and salaries
• corporate overhead

Question 2

Financial objectives

Answer 2

• corporate objectives
• marketing objectives
• operations objectives
• budgeting

Question 3

Financial challenges

Answer 3

• changes in policy
• no history

Question 4

As an investor you want to look at..

Answer 4

• debts and profits
• cash flow
• assets, liability
• equity

Question 5

What is a financial objective

Answer 5

A specific goal of target relating to the financial performance, resources and structure of a business

Question 6

Benefits of financial considerations

Answer 6

• focus given
• important measure of success

Question 7

Benefits of financial objectives

Answer 7

• focus for the business
• important measure of success
• provides transparency for shareholders
• helps coordinate business functions

Question 8

External factors which may effect financial objectives

Answer 8

• competition
• social change
• government
• market change
• economic conditions

Question 9

Internal factors which may effect financial objectives

Answer 9

• manager
• employee welfare
• owners of the business
• size and status of the business

Question 10

Profit

Answer 10

Difference between total revenue and total costs over a period

Question 11

Cash flow

Answer 11

Difference between total cash inflows and outflows over a period

Question 12

How is cash flow different to profits

Answer 12

• timing differences
• the way non current assets are accounted for
• cash flow arising from the way business is financed

Question 13

Gross profit calc

Answer 13

Revenue - cost of sales

Question 14

Net profit calc

Answer 14

Gross profit - operating expenses / taxes

Question 15

Operating calc

Answer 15

Revenue - operating expenses - cost of goods - other expenses

Question 16

Return on capital employed

Answer 16

Financial ratio can be used to access a companies profitability and capital efficiency

Question 17

EQU : ROCE (%)

Answer 17

Operating profit / capital employed x 100

Question 18

Budgets

Answer 18

Financial plan for the future concerning the revenues and costs of a business

Question 19

Budgeting uses

Answer 19

• motivate staff
• communication targets
• improve efficiency

Question 20

What are the 2 main approaches to budgeting

Answer 20

• historical / incremental budgeting
• zero based budgeting

Question 21

What is historical budgeting

Answer 21

Uses last years figures as the basics for the budgets and is realistic as it’s based on actual results. However circumstances can change and doesn’t always increase efficiency

Question 22

What is zero based budgeting

Answer 22

All budgeting costs are set to 0 and is based on new proposal for sales and costs. This is more realistic however, more complicated and time consuming

Question 23

3 main types of budgets

Answer 23

• revenue budget
• cost (expenditure) budget
• profit budget

Question 24

What is a revenue budget

Answer 24

Expected revenues and sales broken down into more detail

Question 25

What is a cost (expenditure) budget

Answer 25

Expected costs based on sales budget

Question 26

What is a profit budget

Answer 26

Based on combined sales and cost budget and is great interest to stakeholders

Question 27

How is profit constructed

Answer 27

1. Analysis market - market size, growth, share and prospects
2. Draws up sales budget - sales forecast, new products and pricing changes
3. Draw up cost budget - based on sales budget and allows for known changes in supplier prices including contingencies

Question 28

2 key sources of financial budgets

Answer 28

1. Financial performance in previous periods
2. Market research

Question 29

What are the difficulties in budgeting accurately

Answer 29

• sales forecast
• costs

Question 30

Advantages of budgeting

Answer 30

• establish priorities
• control expenditure
• provide direction
• increase motivation
• allows planning for the future

Question 31

Disadvantages of budgeting

Answer 31

• may result in going over budget
• may be demotivating if unrealistic
• inflation
• unforeseen changes

Question 32

Values of budgeting

Answer 32

• prioritise
• efficiency
• allows control
• investors
• responsiblity
• motivator

Question 33

Budget construction map

Answer 33

1. Set objectives
2. Information gathering
3. Construct expenditure budget
4. Construct income budget
5. Overall profit budget (break even)
6. Bring together mater budget

Question 34

Contribution

Answer 34

Profit made on individual products, used in calculating how many items need to be sold to cover total costs (variable and fixed)

Question 35

Total cntribution calc

Answer 35

Contribution per unit x number of units sold

Question 36

Contribution calc

Answer 36

Total sales less total variable cost

Question 37

Contribution per unit calc

Answer 37

Selling price per unit less variable cost per unit

Question 38

Profit calc (budgeting)

Answer 38

Contribution less fixed cost

Question 39

Break even

Answer 39

Where revenue and costs are the same, meaning the business is making neither profit nor loss