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Decision Making to Improve Financial Performance - Coggle Diagram
Decision Making to Improve Financial Performance
Setting Financial Objectives
Advantages: provides direction and is used to measure financial performance, supports decision making and these objectives are used to motivate employees.
Return on Investment used to calculate the efficiency of a project by comparing the amount invested with the amount returned
profit from investment/investment cost x100
What may be considered when setting financial goals?
Revenue
quantity of good sold X selling price per item
Cost
fixed cost + variable costs
Investments
Capital Structure
focus on the proportion of capital received from finance
Influences on Financial Objectives
Overall business objectives, financial objectives need to match up
Different departments
Competitors
Shareholders, making sure they are satisfied
Analysing Financial Performance
Cash Flow
Cash flow forecasts are used to estimate their total cash inflows and their total cash outflows for a future period of time
Total Inflow: all the cash coming into the business during the period
Total Outflows: all the cash leaving the business during the period
Net Cash Flow: the difference between total inflows and outflows
Opening Balance: the balance at the start of the month, is the same as the coding balance the previous month
Improving Cash Flow:
Receivables: money owed to the business, businesses can reduce the trade credit period given to increase how quickly the receive their receivables
Payables: money owed to the debtor, a business can ask others for longer trade credit to reduce how quickly they must pay payables
Budgets
Revenue Budgets: forecasts expected revenue for a business during a period
Favourable Variance: actual income is more than budget, or actual expenditure is less than the budget
Adverse Variance: actual income is less than the budget, or actual expenditure is more than budget
Profitability Analysis
Gross Profit: involves the amount of profit remaining once direct costs (cost of sales) have been paid by the business
Gross proft margin = gross profit/sales revenue x100
Operating profit: involves the amount of profit remaining once direct costs (cost of sale) and indirect costs (expenses) have been paid by the business
Operating profit margin = operating profit/sales revenue x100
Profit for the year: involves the amount of profit remaining once all costs and financing fees have been considered
Profit for the year margin: profit for the year/sales revenue x100
Break-Even Analysis: predicts the level of output at which total costs and revenue will be the same
Contribution Per Unit: the amount of revenue, contributes to covering a business' fixed costs after the variable cost per unit has been taken away from revenue per unit
Selling price per unit - variable cost per unit
Total Contribution: the amount of revenue from the sale of all products, contributes to fixed costs once variable costs are taken away
Total revenue - total variable costs
Internal Sources of Finance: the money that is created/raised within a business
Retained Profit
profit that is saved whilst operating, no interest
it is limited, may not be high enough to fund big, long term projects
Personal Savings
personal money invested by the owner of a business
may not be able to afford putting a significant amount of money in to their personal saving
Selling Assets
sell assets to raise cash, usually a cheap source, interest
selling assets can harm a business' operations
External Sources of Finance: finance from a third party
Government Grants
government give grants to businesses to research things that the government is interested in
Share Capital
business can sell shares to others, in return finance gets invested
Private Limited Companies can sell shares to family act or private equity companies
Trade Credit
when businesses pay suppliers at a later date
Bank loans/mortgages
business borrows m money and also pays interest, hard for new businesses to get granted a loan as they are risky
Hire purchase
business pays purchase off in instalments
Family/Friend Loan
usually fund start ups
Other Sources:
Venture Capital: involves investors/venture capitalists providing a business with loans and share capital, supports business growth
Overdraft: service offered by banks allowing a business to borrow an amount of money up to a limit agreed in advance
Debt Factoring: business sells debts to a third party, the party will gain a fee
Debt
Diversification: targeting new products at new markets ri increase sales. Can spread risk as it gives businesses an alternative if the demand for one product declines
Example: Uber, UberEats
Organic Growth
growth of a business through internal, processes, relies on it's own sources
Inorganic Growth
growth from buying other businesses or opening new locations
Improving Cash Flow and Profit
Objectives: profit/profitability increased by reducing expenditure on fixed/variable costs
Challenges: reducing expenditure on fixed/vairable costs can reduce quality, which can reduce sales and therfore revenue
Increasing the selling price can deter customers from purchasing products, can decrease sales volume and market share
Cash Flow
Challenges: removing/reducing trade credit can reduce customer satisfaction, which reduces sales volume and market share
increasing trade credit can create tension, reduces dependability