Financial Strategies Booklet

Question 1

Cash flow targets

Answer 1

Poor cash flow will cause financial issues- e.g reducing overdraft by £5,000 by December

Question 2

Cost Minimisation

Answer 2

Higher profit margins or increased sales volume through lower prices- e.g reducing raw materials by 30%

Question 3

ROCE Targets

Answer 3

maximum % acceptable for the money the business gets back compared to the amount being used- e.g exceed level recorded previous year by…%

Question 4

Shareholders return

Answer 4

satisfy needs of investors- higher dividends per share/increasing share price

Question 5

Internal Influences on OBJ

Answer 5

Business ownership- family business
Size and Status- start up or well known
Other func obj- MOP

Question 6

External influence on OBJ

Answer 6

Economic conditions- Recession/ other countries economy
Competition- cost minimisation
Political and social change- population ages/ inc living wage

Question 7

Benefits of Balance sheets

Answer 7

Measures size of business
Calculates net assets of business
Identifies companies liquidity position
Shows sources of capital

Question 8

Limitations of Balance sheets

Answer 8

Value of many assets based on estimates
Do not include intangible items
Static
Don’t show detail

Question 9

causes of problems with balance sheets

Answer 9

poor control of debtors, creditors and stock
Overtrading
Overborrowing 
Serasonal demand
External Factors

Question 10

Working capital

Answer 10

is day to day finance used in a business

=current assets-current liabilities

Question 11

Purpose of income statement

Answer 11

Review progress during and after final end of year accounts
Allow shareholders to assess if beneficial
Allow shareholders to see if profit is being utilised sensibly
Allows stakeholders to see if profit is high quality

Question 12

Assessing profit quality

Answer 12

High quality- sustainable in long run

Low quality- likely to be lower in future

Question 13

Interpreting published accounts- ratio analysis

Answer 13

Profitability- efficiency to generate profit
Liquidity- ability to pay short term debts
Financial efficiency- business assets are used and controlled
gearing- risk from borrowings
Shareholders return- value of return to shareholders

Question 14

Limitations of ratio analysis

Answer 14

Ratios only in numbers
Look at past not future
Only useful in comparison
Ignores Pestle
Conpetitiveness

Question 15

Window dressing

Answer 15

Manipulation of figures

1. Liquidity
2. Porfitablility

Sale and Leaseback scheme

Question 16

Selecting Financial Strategies

Answer 16

Plans of action that will help a business to develop and maintain a competitive advantage and achieve financial objectives

Question 17

Profit centres

Answer 17

Identifiable parts of an organisation for which costs, revenue and thus profit can be calculated

Question 18

Advantages of Profit Centres

Answer 18

Insights into where profit is earned within business
Motivation for those responsible for p.c
Supports budgetary control

Question 19

Disadvantages of profit centres

Answer 19

Time consuming to set up and monitor
Conflict and competition not co-ordination
Difficulties allocating costs

Question 20

Cost Minimisation

Answer 20

Aims to achieve the most cost ffective way of delivering goods and services to the required level of quality

Question 21

Marketing Impact

Answer 21

Reduce marketing budget
Change marketing strat
Change marketing Mix
Porters Generic Strat

Question 22

HR Impact

Answer 22

Change organistation structure
Review workforce plans
Ban/reduce training
Freeze non essential recruitment

Question 23

Operations Impact

Answer 23

Close stores 
Profit centres
Go online
Relocate
Combine factories
Lean prduction
Mothball factories

Question 24

Allocating capital expenditure

Answer 24

Spending on non current assets such as property, machinery or vehicles

Question 25

Investment appraisal

Answer 25

assessing income streams against cost of investment

Question 26

Payback

Answer 26

How long it will take to pay back the cost of initial investment

1. Calculate year investment will be covered
2. Calculate months= add all moths- initial investments/ next year x 12: round up

Question 27

Average Rate of Return

Answer 27

Average profit as % of cost of initial investment
Average annual return or profit
——————————————— X100
Initial cost of investment

add all years up
————————- = ………… X100 =……%
number of years Investment

Question 28

Net present value

Answer 28

Total return on an investment - time value of money
X net cash flow by discount
+ all annuals NPV’s

Question 29

Payback Advantages

Answer 29

Easy to understand/ compare
Focuses on cash flow
Emphasises speed of return

Question 30

Payback Disadvantages

Answer 30

Doesn’t consider time value of money
Encourages short term thinking
Ignores qualitative aspects
Doesn’t create decision for investment

Question 31

NPV Advantages

Answer 31

Time value of money
Cash flow through life of project
Decision making mechanism

Question 32

NPV disadvantages

Answer 32

Calc sensitive to initial investment cost
More complicated method
Difficult selecting appropriate discounts rate

Question 33

APR Advantages

Answer 33

% return compared with target return
whole profitability of project
focuses on profitability

Question 34

APR disadvantages

Answer 34

Does not take into account cash flows
No account of time value of money
Treats profit timings the same