Decision-making to improve financial performance

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44.2 Financial decisions and competitiveness

Whenever possible, financial directors like to compare their own financial performance with that of a direct competitor. A good case in point is the competition between Ted Baker and SuperGroup plc. 

Among other financial decisions that might affect business competitiveness:

  • Borrowing more: this is a quick and easy way to add capital to a business that is growing, or one that needs a dramatic change in strategy. Unfortunately it runs the medium- to long-term risk that the indebted capital structure will create significant operational risks. 
  • Cutting costs: eg. cutting a layer or management in the Supermarket industry - fierce competition helps lower overheads. 
  • Boosting cash flow: eg. ASOS stretched its time to pay suppliers from 43 days in 2012 to 59 in 2012; helps keep £20m in the bank. 
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44.3 Financial decisions and other functions

No department is as central as finance. Its decisions affect and are affected by every other function. If marketing decides to run a 20% off price promotion that unexpectedly doubles demand, finance will need to find the cash for buying the extra supplies and to pay the overtime bill.

Most finance directors hate unexpected surprises. This is why they are so keen on budgeting, which requires staff to plan ahead and then record any variations from the planned income or expenditure. 

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44.4 Impact on finance of market conditions

Barclay's cut 40,000 staff worldwide. This reflected the bank's worsening revenue position & its withdrawal from some of its highest-risk banking sectors. Then, worsening market conditions dictated the finance department's demand for cost cuts. With Barclay's there was no additional competitive pressure facing it or other high street banks. Despite all the banks' failings and the low esteem in which they were held, most people remained reluctant to switch their current account. 

Bad times place finance at the heart of every business decision. A bigger test comes in good times. If sales and profits are rising, marketing and R&D people may push harder for bigger budgets - and it may be difficult to stop this happening. Those finance departments that succeed in good times are probably managing to pursuade directors that its time for shareholders to get some significant rewards. 

Overall, the finance function tends to want to keep ongoing costs as low as possible, so that profit margins are as high as possible. They tend not to mind share buy-backs because they are a one-off expenditure rather than an on-going one. 

Finance directors hate competition. So any proposal to buy them up will always get backing from the company's directors. Competition is a threat to profit margins and a threat to a secure, easy life for the company. 

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44.5 Ethical & environmental influences

An environmental programme based on recycling and waste minimisation can get the support of the finance function it its advocates can prove that cost reductions will make the proposal profitable. Similarly Fairtrade supplies needs to justify itself in terms of the value it adds to consumers' perception of the brand. For a busienss to make a genuine move towards ethical practices it would be essential that the finance department got instructions from on high Then co-operation will happen.

Another important aspect of modern finance is tax 'planning', that is, the deliberate act of tax avoidance. In the UK there has been a successful effort to point the finger of blame at US companies, especially those in the technology sector. Unfortunately, the tax-dodging deals are done by senior finance executives. And if you think that tax avoidance is ethically neutral, how cn it be fair that a tax-paying comapny such as Ted Baker ahould compete with a business that does not. A level playing field is an important underpinning to an effective market. 

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44.6 Technological influences

Currently crowdfunding is a fashionable approach to capital raising, especially for businesses with a consumer-friendly business proposition. Crowdfunding today, is unquestionably an online process. 

More fundamental, perhaps, are the financial implications of key strategic decisions about whether to function via 'bricks' or 'clicks'. Setting up a network of shops or physical outlets implies huge fixed operating costs and therefore a high BE point. Having onlyy a digital/online presence cuts those costs dramatically and therefore brings the BE down. Much though this would please finance managers, the downside is that it may be much harder to build sales virtually than physically. 

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