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.

Setting financial objectives


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


Analysing financial performance


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


Making financial decisions: sources of finance


Additional information

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


Making financial decisions: improving cash flow and profits


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