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 

Budgets 

• 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 

Variances 

• 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 

The…