Decision making to improve financial performance


Profit = total revenue - costs 

Cash flow - flow of money in and out of a business

Revenue - selling price per unit x number of units sold 

Fixed costs = total costs - variable costs 

  • Rent 
  • Insurance 
  • Property tax

Variable vosts  = variable costs per unit x number of units sold

  • Wages 
  • Freight out 
  • Direct materials 

Total costs = fixed costs + variable costs 

Financial objectives 

  • The monetary targets a business wants to achieve within a set period of time 
  • Return on investment, capital structure, revenue, costs, profit, cash flow 

Return on investment 

  • A measure of a firm's profitability and performance 
  • How effectively is it using money tied up in the business 

Operating profit x 100

Capital invested 

The proportion of long-term funding that is debt 

  • Long term funding is the amount of capital that has been invested in a business and will stay in the business for over a year
  • Equity or debt 

Debt       x100

long term funding 

Cash flow objectives 

  • Movement of money into and out of a business 
  • A healthy cash flow is necessary to meet day to day expenses 

Internal influences 

  • Financial objectives 
  • The characteristics of the firm 
  • Relationship between openers and directors 
  • Public or private sector 
  • Competitors 
  • Consumers 
  • Economic conditions 
  • External environment 


  • Forecasts or plans for the future finances of a business

Income budgets 

  • A target set for the amount of revenue to be achieved in a set time period 

Expenditure budgets 

  • A limit placed on the amount to be spent in a given period of time 

Profit budgets

  • A target set for the surplus between income and expenditure in a given period of time 


  • Adverse - one that is bad for the business 
  • Favourable - one that is good for the business 

Possible causes of variance 

  • Actions of competitors 
  • Action of suppliers 
  • Changes in the economy 
  • Internal efficiency 
  • Internal decision making 

The value of setting budgets - advantages

  • Provides quantifiable target against which outcomes can be measured 
  • Informs decision making 
  • Motivates budget holders due to increased responsibility 

The value of setting budgets - disadvantages 

  • Potential for conflict 
  • May be restrictive 
  • Time consuming to set and monitor 



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