Unit 5: Decision-making to Improve Financial Performance Flashcards
Causes of cashflow problems
Low profits or losses
Too much production capacity
Excess inventories held
Allowing customers too much credit and too long to pay
Overtrading- growing business too fast
Improving cashflow
Effective credit control
Improving cash flow from creditors
Improving cash flow from inventory
Types of financial objectives
Cost minimisation
Profit
Cash flow
Investment objectives
Set objectives
Please shareholders
Revenues
The amount value of a product the customers actually buy from a business
Demand
The amount of a product that customers are prepared to buy
What can influence the demand for products?
Prices & incomes
Taste & fashions
Competitor actions
Social & demographic change
Seasonal changes
Changing technology
Government decisions
What can businesses improve revenue?
Increase quality sold
Achieve a higher selling price
Ways to improve profit
USP
Reduce variable costs
Increase price
Increase productions
Reduce fixed costs
Break-even
The output which total revenues equals total costs
Contribution
Looks at the profit made on individual products
M
Margin of safety
The difference between the actual output and the break even output
Benefits of Break-even
Focuses on what output is required before a business reaches profitability
Calculating are quick and easy
Illustrates importance of keeping fixed costs down to a minimum
Drawbacks of Break-even
Most businesses sell more than one product
A planning aid rather than a decision making tool
Sales are unlikely to be the same as output- there may be some build up of stocks or wasted output too
Revenue budget
Expected revenues & sales
Broken down into more detail
Cost budget
Expected costs based on sales budget
Overheads & other fixed costs
Profit budget
Based on the combined sales & costs budgets of great interest to stakeholders
May form basis for performance bonuses
Favourable
Costs are lower than expected, sales are higher than expected- increase in profit
Variance Analysis
Compares the actual figures against the budgeted
Adverse
Costs are higher than expected, sales are lower than expected- decrease in profit
Benefits of using budgeting
Motivates staff
Allows targets to be set
Eliminates waste
Provides financial control
Company are less likely to end up in debt
Could attract investors
Drawbacks of using budgeting
Not always fair
It is time-consuming
Not always accurate - does not allow for unforeseen changes
May have to hire someone else or train staff to be able to do it - additional costs
Disadvantages of Overdrafts
High interest
Limit on the amount
It’s short term
Overdrafts
an agreement that allows you to keep making payments such as staff wages or day-to-day expenses even when there is no money in the business bank account.
Advantages of Overdraft
Help in emergency situations
Flexible
Easy to get
Debt factoring
When a business sells its accounts receivables to a third party at a discount
Advantages of Debt factoring
Money straight away
Don’t have to worry about chasing up debts
Improves cash flow
Disadvantages of Debt factoring
Won’t get full amount
Sold/offer credit
Bank loans
Your business borrows a sum of money and pays it back over a set period of time, with interest charges added
Advantages of Bank loans
Plan budgets
Lower interest
High amounts of capital
Disadvantages of Bank loans
Interest
Difficult to get if bad credit
High fixed costs that need to be payed
Mortgages and debentures
A form of security that a Company grants to a lender in exchange for funding
Advantages of Mortgages and debentures
Lower interest
Helps buy assets
Lower in payments
Disadvantages of Mortgages and debentures
Difficult to get
Not flexible
Tied in for a long period of time
Retained profit
the amount of a business’s net income that is kept within its accounts, rather than paid out to shareholders
Advantages of Retained profit
No repayments
Higher amounts
Disadvantages of Retained profit
Shareholders not happy
Can’t get it if not profits
Venture capital
a form of private equity and a type of financing for start-up companies and small businesses with long-term growth potential
Advantages of Venture capital
More likely to invest in risky investments
Disadvantages of Venture capital
Less control
Unlikely
Hard to get
Share capital
the money invested in a company by the shareholders
Advantages of Share capital
Low interest payments
More capital
More knowledge
Disadvantages of Share Capital
Risk of takeover
Dividends
Conflict between shareholders and stakeholders
