3.5 decision making to improve financial performance

Question 1

financial objectives

Answer 1

revenue objectives
cost objectives
profit objectives
cash flow objectives
investment objectives

Question 2

benefits of using financial objectives

Answer 2

• focus for the business
• important measure of success
• reduce risk of failure
• provide transparency for shareholders
• key context for making investment decisions

Question 3

internal influences on financial objectives

Answer 3

business ownership - family owned, reasonable profit, venture capitalist want more growth/profit
size - start ups more focused on survival

Question 4

external influences on financial objectives

Answer 4

economic conditions - downturn, demand falls, set cost minimising objectives
competitors - if competitor can grow market share if it’s cheaper, may want to cost minimise

Question 5

capital structure of business

Answer 5

parts that are debt and equity
- bank loans/ other debt
- share capital/ retained profits

Question 6

higher debt reasons

Answer 6

interest rate low, cheap to finance
profits and cash flow strong, debt can be repaid easily

Question 7

higher equity reasons

Answer 7

where there is a high risk to having debt

Question 8

uses of budgeting

Answer 8

establish priorities
allocate recourses
monitor performance

Question 9

problems with budgeting

Answer 9

unexpected costs
only as good as data put into it
may lead to inflexibility

Question 10

sources of finance

Answer 10

debt factoring
overdrafts
retained profits
share capital
loans
venture captial

Question 11

debt factoring

Answer 11

sells their invoices to a factoring company
A - receivables turned into cash
focus on selling and not collecting debt
D - factoring company take money
customers may feel relationship is chanced with the business

Question 12

bank loans advantages and disadvantages

Answer 12

A - certainty of funding, lower rate than overdraft
D - hard to arrange, requires security, small businesses hard to get them

Question 13

overdrafts advantages and disadvantages

Answer 13

A - easy to arrange, flexible, interest only paid on the amount used
D - high interest rate, varies with the interest rate

Question 14

retained profit advantages and disadvantages

Answer 14

A - flexibility, owners in control, low cost
D - opportunity cost of making profit, drain on finance of loss making