5 Decision making to improve financial performance Flashcards
common financial objectives
- Profit
- Revenue
- Cash flow
- Break even
- ROI
- Gearing
what is the value of setting financial objectives
- helps meet corporate objectives
- keep on track with functional objectives
- allows for budgeting for resource allocation
- measurements for SMART objectives
investment appraisal
a decision making tool that is used to compare the costs of an investment and its expected revenue
capital employed is the
long term funding that shows where business gets money from
Share equity is the
money that is funded through shareholders
internal influences on financial objectives
- corporate objectives
- functional objectives
- leaders
- finances available for the business
external influences on financial objectives
- PESTLE
- Competitors
a budget is
a monetary target set to enable a business to achieve its corporate objectives
the three types of budgets are
- expenditure
- profit
- income
capital structure has got to do with
the amount of funding the business has via equity and debt
gross profit
revenue - cost of goods
operating profit
gross profit - cost of operating
profit for the year
operating profit - all other expenses
purpose of setting budgets
- provides a clear plan for the business
- motivating for staff
- enhances credibility of a business plan
- allows for purchasing decisions to be made by experts
difficulties in setting budgets
- bias
- relies on accurate data
- relies on expertise of entrepreneur
- unforeseen changes in external environment like competition, inflation
- time consuming - opportunity cost
variance analysis
process of comparing budgets to the actual financial performance of the business
what does a favourable variance lead to
lead to greater profits
what does an adverse variance analysis lead to
leads to lower profits
receivables is
the money that the business is owed by its debtors
payables is
the money the business owes to its creditors
what order is the cash flow forecast in
- Cash inflows
all the inflows like capital, revenue, receivables etc - Cash outflows
all the outflows like wages, materials, payables - Net cash flow (inflows - outflows)
- Opening balance (last months closing balance)
- Closing balance ( opening balance + net cash flow)
