Financial Strategies Booklet Flashcards
Cash flow targets
Poor cash flow will cause financial issues- e.g reducing overdraft by £5,000 by December
Cost Minimisation
Higher profit margins or increased sales volume through lower prices- e.g reducing raw materials by 30%
ROCE Targets
maximum % acceptable for the money the business gets back compared to the amount being used- e.g exceed level recorded previous year by…%
Shareholders return
satisfy needs of investors- higher dividends per share/increasing share price
Internal Influences on OBJ
Business ownership- family business
Size and Status- start up or well known
Other func obj- MOP
External influence on OBJ
Economic conditions- Recession/ other countries economy
Competition- cost minimisation
Political and social change- population ages/ inc living wage
Benefits of Balance sheets
Measures size of business
Calculates net assets of business
Identifies companies liquidity position
Shows sources of capital
Limitations of Balance sheets
Value of many assets based on estimates
Do not include intangible items
Static
Don’t show detail
causes of problems with balance sheets
poor control of debtors, creditors and stock Overtrading Overborrowing Serasonal demand External Factors
Working capital
is day to day finance used in a business
=current assets-current liabilities
Purpose of income statement
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
Assessing profit quality
High quality- sustainable in long run
Low quality- likely to be lower in future
Interpreting published accounts- ratio analysis
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
Limitations of ratio analysis
Ratios only in numbers Look at past not future Only useful in comparison Ignores Pestle Conpetitiveness
Window dressing
Manipulation of figures
- Liquidity
- Porfitablility
Sale and Leaseback scheme
Selecting Financial Strategies
Plans of action that will help a business to develop and maintain a competitive advantage and achieve financial objectives
Profit centres
Identifiable parts of an organisation for which costs, revenue and thus profit can be calculated
Advantages of Profit Centres
Insights into where profit is earned within business
Motivation for those responsible for p.c
Supports budgetary control
Disadvantages of profit centres
Time consuming to set up and monitor
Conflict and competition not co-ordination
Difficulties allocating costs
Cost Minimisation
Aims to achieve the most cost ffective way of delivering goods and services to the required level of quality
Marketing Impact
Reduce marketing budget
Change marketing strat
Change marketing Mix
Porters Generic Strat
HR Impact
Change organistation structure
Review workforce plans
Ban/reduce training
Freeze non essential recruitment
Operations Impact
Close stores Profit centres Go online Relocate Combine factories Lean prduction Mothball factories
Allocating capital expenditure
Spending on non current assets such as property, machinery or vehicles
Investment appraisal
assessing income streams against cost of investment
Payback
How long it will take to pay back the cost of initial investment
- Calculate year investment will be covered
- Calculate months= add all moths- initial investments/ next year x 12: round up
Average Rate of Return
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
Net present value
Total return on an investment - time value of money
X net cash flow by discount
+ all annuals NPV’s
Payback Advantages
Easy to understand/ compare
Focuses on cash flow
Emphasises speed of return
Payback Disadvantages
Doesn’t consider time value of money
Encourages short term thinking
Ignores qualitative aspects
Doesn’t create decision for investment
NPV Advantages
Time value of money
Cash flow through life of project
Decision making mechanism
NPV disadvantages
Calc sensitive to initial investment cost
More complicated method
Difficult selecting appropriate discounts rate
APR Advantages
% return compared with target return
whole profitability of project
focuses on profitability
APR disadvantages
Does not take into account cash flows
No account of time value of money
Treats profit timings the same
