3.5 Decision making to improve financial performance

Students should consider the following throughout this section of the specification:

  • how developments in technology are affecting financial decision making and activities (eg crowd funding)
  • market conditions and competition
  • ethical and environmental influences on financial decisions
  • how decisions in finance improve the competitiveness of the business
  • the interrelationship between financial decisions and other functions.

3.5.1 Setting financial objectives

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Additional information

The value of setting financial objectives

Financial objectives to include:

  • the concept of a return on investment
  • an understanding of the proportion of long-term funding that is debt.

The distinction between cash flow and profit

 

The distinction between gross profit, operating profit and profit for the year

 

Revenue, costs and profit objectives

 

Cash flow objectives

 

Objectives for investment (capital expenditure) levels

 

Capital structure objectives

 

External and internal influences on financial objectives and decisions

 

3.5.2 Analysing financial performance

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Additional information

How to construct and analyse budgets and cash flow forecasts

Analysing budgets should include variance analysis and adverse and favourable variances.

The value of budgeting

 

How to construct and interpret break-even charts

Break-even analysis should include:

  • break-even output
  • margin of safety
  • contribution per unit
  • total contribution.

How to calculate and illustrate on a break-even chart the effects of changes in price, output and cost

 

The value of break-even analysis

 

How to analyse profitability

Analysing profitability should include the following ratio analysis:
  • gross profit
  • profit from operations
  • profit for the year.

How to analyse timings of cash inflows and outflows

Analysing timings of cash flow should include an understanding of payables and receivables.

The use of data for financial decision making and planning

 

3.5.3 Making financial decisions: sources of finance

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Internal and external sources of finance

Sources of finance should include:

  • debt factoring
  • overdrafts
  • retained profits
  • share capital
  • loans
  • venture capital.

Advantages and disadvantages of different sources of finance for short- and long-term uses

 

3.5.4 Making financial decisions: improving cash flow and profits

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Additional information

Methods of improving cash flow

Students should be able to assess ways of improving cash flow.

Methods of improving profits and profitability

Students should be able to assess ways of improving profitability.

Difficulties improving cash flow and profit