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Unit 5 -- finance - Coggle Diagram

- - - - Sales are hard to predict.
      - Customers may not pay on time.
      - Costs may prove higher then expected (inflation).
- - - - gross profit = revenue - cost of sales
      - Cost of sales -- these are the costs that are directly linked to the selling of products and includes the cost of raw materials and direct labour costs.
    - - operating profit = revenue - (cost of sales + administrative expensives)
      - Administrative expensives -- these are costs that are not directly to the goods or services and includes costs such as distribution costs and overheads.
    - - operating profit = revenue - total costs
      - This includes finance expensives and taxtion.
  - - - Sales maximisation - aims to maximise total sales regardless of profitability.
      - Market share -- grow market share.
      - Revenue growth -- this means increasing the amount of renevnue a business generates.
    - - Cost minimistation -- this aims to achieve the most cost effective way of delevering goods and services to the required level of quality.
      - Benefits
        
        Lower unit costs.
        
        Higher gross profit.
        
        Higher operating profit.
        
        Potentially improve cash flow.
        
        Higher return on investment.
    - - Specific profit objective -- achieve an operating profit of a certian amount.
      - Rate of profitability -- this is an objective of obtiaining an operating profit margin of a certian amount.
      - Profit maximistation -- maximise total profit for the year.
      - Exceed industry or market profit margins -- achieve a higher gross profit or operating profit margin than key competitors.
    - - A strong cash flow makes it easier to achieve other financial objectives by providing more day to day cash.
      - Examples
        
        Reduce borrowing
        
        Minimise interest costs
        
        Reduce seasonal swings in cashflow
    - - Level of capital expenditure (i.e control how much money is beign invested).
      - Return on investment
        
        This aims to improve a businesses return on investment as a business wants a high return on investment.
  - - - Used to show how much of the business is debt.
  - - - Business ownership.
      - Size and status of the business.
      - Size and financial demand of other functional areas.
    - - Economic conditions
      - Actions of competitors
      - Social and political change
- - - - Pros
        
        Only costs money is the business is profitable (that is the only time dividends are paid).
        
        Enables some businesses to raise large sums of money.
        
        No interest to pay.
      - Cons
        
        Business and founders loose control/ownership as shareholders gain some of the business.
        
        There is a threat of hostile takeover.
        
        Can be complex and costly to issue shares.
    - - Retained profits -- these are the profits a business keeps from the last financial year.
      - Pros
        
        Avoids interest payments.
        
        Deosn't dilute ownership.
      - Cons
        
        Only an option if the business retains profits.
        
        Can upset shareholders if it reduces dividends.
        
        Uses up retained profits that can act as a security blanket for the business.
    - - Venture capital -- this is where a business or person will invest money into a business commonly a start-up which caries a substianl level of risk (e.g Dragons Den).
      - Pros
        
        Potential for large sums of money.
        
        Can provide expertise to help the business.
        
        Makes it safer for other sources of finance.
        
        Provides the required capital for expansion.
      - Cons
        
        A long term and complex process.
        
        A business needs a concrete business plan to justify the risk to the venture capitalists.
        
        Can be expensive early on due to legal and accounting fees.
        
        Risk of conflict (due to different ambitions of the venture capitalist and management (e.g rapid or steady growth)).
    - - Long term bank loan -- These are bank loans with a fixed interest rate and which are usually secured against business assets.
    - - Crowdfunding -- this is the process of raising large sums of money from a wide range of people all of whom usually provide a small amount. This is commonly done over the interet and those that invest will commonly gain small rewards.
  - - - Leasing is commonly used by a business to rent long term equipment such as IT systems, company cars and printers.
    - - Higher purchase agreements -- these are deals with the consumer where the consumer buys an expensive product, but pays it off in installments. Once the last installment is paid they own the products.
    - - Government grant -- this is a financial reward given by the governemnt to business for beneficial products, the grantee is not expected to rapay the grant, but is expected to use it well (commonly used to stimulate the economy in deprived areas and in emerging industries such as tech).
  - - - Trade credit -- this enables a business to delay when it pays a business (i.e buy now, pay later).
    - - Debt factoring -- this is where a business sells its debt to a third party who will collect the debt in exchange for a share of the debt (i.e a business buys debt off another business, but keeps some as profit).
      - Pros
        
        The business that orginally has the debt deos not have to wait for the debt to be repaid.
        
        Debts are chased by experts and this saves managers time.
      - Cons
        
        A business deos not get all its debt back.
        
        May damage the businesses reputation as it may be seen as in need of short term finace (may impact share prices).
- - - - Varriences -- these are the differences between the actaul budget and the predicated budget.
      - Adverse -- this is where a business's performance has been worse then expected (although they can still be profitable).
      - Favourable -- this is where a business's performance has been better then expected (although they can still be unprofitable).
      - Interpreting variances
        
        Once a varience has been indentified a business should:
        
        Identify the cause of the variance.
        
        Consider the effect of the variance (for example will they need a loan?).
        
        If approaite, look for a solution.
      - Causes of variances
        
        Actions of competitors.
        
        Actions of suppliers.
        
        Changes in the economy.
        
        Changes in internal effiency.
        
        Internal decision making (e.g supplier change or you close a store).
      - The study and analysis of variences enables businesses to identify weaknesses in the business and focus on improving those areas.
    - - Can help set targets (e.g cut unit costs by 10%).
      - Helps provide direction and coordination.
      - Helps management delaget without loosing control (they still control the budget).
    - - Managerial responsibility is clearly defiend in the budgets (who/which department has/controls what).
      - Managers must adhere to the budgets (as best they can).
      - Managers and departmental performance is based off budgets.
      - Corrective action is taken if thee is a large varience.
      - Variences that are unacounted for must be investigated (helps prevent embezolement).
    - - Historical budgeting
        
        Last years figures are the basis of this method.
        
        This is a realistic estimate to what the future will be like as it is based off past events.
        
        Con: it fails to take into account possible changes to the external and internal enviroments.
      - Zero budgeting
        
        Each year, each departments argues its case for a set amount of budget and budgets are based on the predications of each department.
        
        Cons:
        -- This makes budgeting choatic and complicated.
        -- A charismatic manager may be able to get a larger budget they their department deserves.
        
        Forces management to justify every expense they make and this should help cut waste from the business.
    - - Revenue/income budgets -- based off each departments (either functional, product or regional) predicated revenues.
      - Cost/expenditure budgets -- based of the exected costs of a business.
      - Profit budgets -- these are based on both the revenue and cost budgets and are used to predict the profit of a business. These are of great interest to stakeholders and may be the basis of performance based ratings.
    - - Sales forcast
        
        Can be hard to forcast sales in rapidly changing markets (such as tech).
        
        It can be hard for startup businesses to predict sales as they have little to no prioir data.
        
        Can be hard to predict competitor actions.
      - Costs
        
        There will always be unexpected costs.
        
        Can be impacted by the external enviroment (e.g inflation).
    - - Potenial conflict.
        
        A lack of transparency may lead to managers feeling short changed.
        
        Budgets may be to hard to achieve, putting to much pressure on managers.
      - Maybe restrictrive.
        
        Managers may pass up opportunities over fears it will damage their budget.
        
        May force ineproatiate cost cutting.
      - Can waste time setting and monitoring them.
      - Budgets are only as good as the data that is inputed to them meaning that poor data collection will make budgets effectivly worthless.
  - - - Contribution -- this is a measure how much profit comes from a product or product line.
      - Contribution = total sales - total variable costs
      - Contribution per unit = selling price per unit - variable costs per unit
      - Profit = contribution - fixed costs
      - Total contribution = contribution per unit X fixed cost
    - - Shows the business how much it needs to produce to be profitable.
      - Helps show the importance of keeping fixed costs down.
      - Quick and easy.
      - Helps show how long it should take for a startup to become profitable.
    - - Unrealistic as fixed costs can change as output increases (e.g needing to expand to a bigger premise).
      - Output deos not equal sales and therefore just because you are producing enough products deos not mean you are profitable.
      - Variable costs do not increase at the same rate constantly, there growth can slow due to economies of scale.
      - Most businesses sell more then one product, but a break even chart is only for one product.
      - It is a planning aid not a decision making tool.
  - - - Gross profit margin = (GP/revenue)X100
      - A bad GPM indicates the business is:
        
        The business is not managing the cost of sales effectivily.
        
        Sales in decline.
    - - Operating profit margin = (OP/revenue)X100
      - A bad OPM indicates the business is:
        
        Poor at managing its expenses.
        
        Sales in decline.
    - - PFYM = (PFY/revenue)X100
      - A bad PFYM indicares the business is:
        
        Gross profit or operating profits are in decline.
        
        Interest rates have changed.
    - - Sell the same number of products for more.
      - Sell more at the same price.
      - Sell the same amount, at the same value, but reduce costs.