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SECTION 5: DECISION MAKING TO IMPROVE FINANCIAL PERFORMANCE - Coggle…
SECTION 5: DECISION MAKING TO IMPROVE FINANCIAL PERFORMANCE
FIANCIAL OBJECTIVES
revenue/ costs/ profit
profit
the difference between all sales revenue and expenditure
revenue
starting point for creating a budget
may depend on market, state of economy
costs
cost minimisation
cash flow
the difference between inflows and outflows
targets for monthly balance
reduction of bank borrowing
reduction of seasonality
targets for achieving payment from customers
extension of the businees's credit period to pay suppliers
investment levels
capital expenditure is the money used to purchase, upgrade or improve the life of long term assets
when a business is first set up or as a business grows and develops
it depends upon
the overall corporate objectives
the type of business
the state of the economy
the market
capital structure
equity
the money a business raises through the issues of shares
borrowing
the money a business raises through loan capital
external influences
competitiors actions
market forces
economic factors
political factors
technology
internal influences
corporate objectives
resources available
operational factors
FINANCIAL DECISIONS
sources of finance
external sources
equity
money provided by owners and shareholders
does not have to be paid back and no interest
loans
money raised from a creditor
have to be paid back with interest
venture capital
for medium and small businesses
provides funds as a loan or in return for a share of the business
crowdfunding
raising funding from a large number op people who contribute a small amount
internal sources
retained profit
profit that is not paid to the shareholders and is kept in the business for future invesmtent
sale of assets
sells assets its no longer requires
short term
overdraft
bank allows a business to over spend up to an agreed limit
interest paid only on amount overdrawn
debt factoring
when a business sells its bills
immediate cash flow but can effect customer relationships
trade credit
when a business receives materials but pays at a later date
if late paying can damage credit history
improving profits
methods
increasing prices
cutting costs
using capacity as fully as possible
increasing efficiency
difficulties
reduce sales
reduction in quality
problems in matching supply with demand
redundancies may occur
improving cash flow
cash flow problems
poor management
giving too much trade credit
overtrading
unexpected expenditure
methods to improve
factoring
sales and leaseback
improving working capital control
selling stocks
making customers pay on time
longer payables window
FINANCIAL THEORIES
budgeting
income budgets
the forecasted earnings from sales
expenditure budgets
the expected spending of the business
the process of setting budgets
stage 1
prepare income budgets
market research
market research
trading records (for established businesses)
stage 2
construct expenditure budgets
use income budgets as a guide
potential suppliers may offer information on costs
stage 3
forecast profit or loss by comparison of income and expenditure
break even
contribution
the amount of money left over after variable costs have been subtracted from sales revenue
total contribution = unit contribution x output
effect of a change in price
sales revenue line will change
break even will change
effect of a rise in fixed costs
fixed costs line and total costs line moves up
break even output increases
effect of a fall in variable costs
variable costs line moves total costs line moves
breakeven output will decrease
profitability
gross profit margin
gross profit/ sales revenue x 100
operating profit margin
operating profit/ sales revenue x 100
profit for the year margin
profit for the year/ sales revenue x 100
cash flow
cash-flow forecast
receipts
the expected total month by month receipts are recourded
payments
the expected monthly expenditure by item is recorded
running balance
a running total of the expected bank balance at the beginning (opening statement) and end (closing balance) of the month
FINANCIAL CALCULATIONS
costs/ revenue
break-even
cash flow
profit levels
profit levels
gross profit
the difference between a businesses sales revenue and the direct costs of production
sales revenue- direct costs of production
operating profit
sales revenue minus direct and indirect costs of production
sales revenue - all costs of production
gross profit - expenses
profit for the year
all money made from other income and the direct income or other expenditure to pay
operating profit + other income - other expenditure
return on investment
profit from investment/capital invested x 100
gearing ration
loan capital/total capital x 100
total capital
loan capital + equity
