decision making to improve financial performance Flashcards
(19 cards)
What are common financial objectives?
Return on investment, revenue, cost and profit objectives, and cash flow objectives.
What is the value of setting financial objectives?
Provides focus, helps monitor performance, supports planning, and aligns with business goals.
What is the distinction between cash flow and profit?
Cash flow is money in and out; profit is revenue minus costs over a period.
What are the types of profit to distinguish?
Gross profit, operating profit, and profit for the year (net profit).
What is budgeting used for in finance?
To plan income and expenditure, control finances, and assess performance.
What is variance analysis?
The process of comparing budgeted to actual figures to find adverse or favourable differences.
What are the components of break-even analysis?
Break-even output, margin of safety, contribution per unit, and total contribution.
How do changes in price, output, and costs affect break-even charts?
They shift the break-even point and affect profitability and margin of safety.
What is the value of break-even analysis?
Helps assess risk, plan output and pricing, and understand cost structures.
What profitability ratios should be analysed?
Gross profit margin, operating profit margin, and profit for the year margin.
How can businesses analyse timings of cash flow?
By understanding payables (when to pay suppliers) and receivables (when customers pay).
What are internal sources of finance?
Retained profit and sale of assets.
What are external sources of finance?
Overdrafts, loans, share capital, venture capital, debt factoring, and crowd funding.
What are the pros and cons of overdrafts?
Flexible short-term finance, but high interest and risk of being withdrawn.
What are the pros and cons of retained profit?
No interest or ownership dilution, but opportunity cost and limited availability.
What is the value of using different sources of finance?
Balancing short- and long-term needs, cost, and control considerations.
How can businesses improve cash flow?
Speeding up receivables, delaying payables, reducing stock levels, and using short-term finance.
How can businesses improve profit and profitability?
Increase revenue, reduce costs, improve efficiency, and increase prices where possible.
What are the difficulties in improving cash flow and profit?
Market constraints, impact on customer relations, rising costs, and short-term trade-offs.
