BUSS3 - SELECTING FINANCIAL STRATEGIES

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Cost minimisation approaches and benefits:

Strategic approach - Based on the business model. e.g. locating production overseas or core activities vs outsourced.

Tactical approach - Focused on the detailed business functions. e.g. choice of suppliers or the approach to stock holding.

Cost minimisation leads to - Lower unit costs, higher gross profit margin, higher operating profits, improved cashflows and a higher rate on capital employed (ROCE)

Key sources of cost reductions:

  • Eliminating waste and avoiding cuplication - Lean production
  • Simplifying processes and procedures
  • Outsourcing non core activities. e.g. transaction processing, payroll and call handling
  • Negotiating better prices from suppliers
  • Pruning product ranges and customer accounts to eliminate unprofitable business
  • Introducing flexiable working practices

Profit centres - separately-identifiable part of a business for which it is possible to identify revenues and costs (e.g. calculate profit)

Advantages:

  • Shows where the profit is being earnt within the business
  • Supports setting profit

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