3.5 - Decision Making To Improve Financial Performance Flashcards
Financial considerations
- seasonal
- competitive prices
- packaging
- CSR
- ingredients
- logistics
- retailer
- value added tax
- profit margins
- shareholders
- manufactures budgets
- wages and salaries
- corporate overhead
Financial objectives
- corporate objectives
- marketing objectives
- operations objectives
- budgeting
Financial challenges
- changes in policy
- no history
As an investor you want to look at..
- debts and profits
- cash flow
- assets, liability
- equity
What is a financial objective
A specific goal of target relating to the financial performance, resources and structure of a business
Benefits of financial considerations
- focus given
- important measure of success
Benefits of financial objectives
- focus for the business
- important measure of success
- provides transparency for shareholders
- helps coordinate business functions
External factors which may effect financial objectives
- competition
- social change
- government
- market change
- economic conditions
Internal factors which may effect financial objectives
- manager
- employee welfare
- owners of the business
- size and status of the business
Profit
Difference between total revenue and total costs over a period
Cash flow
Difference between total cash inflows and outflows over a period
How is cash flow different to profits
- timing differences
- the way non current assets are accounted for
- cash flow arising from the way business is financed
Gross profit calc
Revenue - cost of sales
Net profit calc
Gross profit - operating expenses / taxes
Operating calc
Revenue - operating expenses - cost of goods - other expenses
Return on capital employed
Financial ratio can be used to access a companies profitability and capital efficiency
EQU : ROCE (%)
Operating profit / capital employed x 100
Budgets
Financial plan for the future concerning the revenues and costs of a business
Budgeting uses
- motivate staff
- communication targets
- improve efficiency
What are the 2 main approaches to budgeting
- historical / incremental budgeting
- zero based budgeting
What is historical budgeting
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
What is zero based budgeting
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
3 main types of budgets
- revenue budget
- cost (expenditure) budget
- profit budget
What is a revenue budget
Expected revenues and sales broken down into more detail
What is a cost (expenditure) budget
Expected costs based on sales budget
What is a profit budget
Based on combined sales and cost budget and is great interest to stakeholders
How is profit constructed
- Analysis market - market size, growth, share and prospects
- Draws up sales budget - sales forecast, new products and pricing changes
- Draw up cost budget - based on sales budget and allows for known changes in supplier prices including contingencies
2 key sources of financial budgets
- Financial performance in previous periods
- Market research
What are the difficulties in budgeting accurately
- sales forecast
- costs
Advantages of budgeting
- establish priorities
- control expenditure
- provide direction
- increase motivation
- allows planning for the future
Disadvantages of budgeting
- may result in going over budget
- may be demotivating if unrealistic
- inflation
- unforeseen changes
Values of budgeting
- prioritise
- efficiency
- allows control
- investors
- responsiblity
- motivator
Budget construction map
- Set objectives
- Information gathering
- Construct expenditure budget
- Construct income budget
- Overall profit budget (break even)
- Bring together mater budget
Contribution
Profit made on individual products, used in calculating how many items need to be sold to cover total costs (variable and fixed)
Total cntribution calc
Contribution per unit x number of units sold
Contribution calc
Total sales less total variable cost
Contribution per unit calc
Selling price per unit less variable cost per unit
Profit calc (budgeting)
Contribution less fixed cost
Break even
Where revenue and costs are the same, meaning the business is making neither profit nor loss
