5. Decision Making to Improve Financial Performance

Financial Objective

A specific goal or target relating to the financial performance, resources, and structure of a business; should be SMART (Specific, Measurable, Attainable, Relevant, Time-bound).

What is the value of setting financial objectives?

• Provides a focus for the entire business.

• Serves as an important measure of success or failure.

• Helps reduce the risk of business failure.

• Provides transparency for stakeholders about their investment.

• Helps coordinate different business functions.

• Provides the key context for making investment decisions (investment appraisal).

Revenue Growth

Increase in sales revenue, expressed as a percentage or value, representing a key financial objective for businesses.

Sales Maximisation

A revenue objective focused on achieving the highest possible sales volume or revenue, often pursued by businesses.

Market Share

The percentage of total sales within a specific market that a business controls, often a key revenue-related financial objective.

Cost Minimisation

A cost-related financial objective focused on reducing expenses to the lowest possible level without compromising quality or output.

Unit Costs

The cost of producing one unit of a product or service, a key metric in cost management and financial objectives.

Rate of Profitability

Profit expressed as a percentage of revenues, indicating the efficiency of a business in generating profit from sales.

Profit Maximisation

A profit-related financial objective focused on achieving the highest possible profit level for the business.

Cash Flow

The movement of money into and out of a business, crucial for meeting short-term obligations and achieving financial stability.

Capital Structure

The mix of debt and equity used to finance a business's operations and assets, influencing financial risk and return.

Gearing

The percentage of capital provided by debt, indicating the level of financial risk a business faces.

Return on Investment (ROI)

A financial metric that measures the profitability of an investment, expressed as a percentage of the investment cost.

Return on Capital Employed (ROCE)

A financial ratio that measures a company's profitability relative to its capital employed.

Operating Profit

The profit earned from a company's core business operations, before deducting interest and taxes.

Operating Profit Margin

The ratio of operating profit to sales revenue, expressed as a percentage.

Gross Profit

The profit a company makes after deducting the cost of goods sold (COGS) from its revenue.

Gross Profit Margin

The ratio of gross profit to sales revenue, expressed as a percentage.

Working Capital

The difference between a company's current assets and current liabilities, representing the money available for day-to-day operations.

Trade Receivables (Debtors)

Amounts owed to a business by customers for goods or services sold on credit.

Trade Payables (Creditors)

Amounts owed by a business to suppliers for goods or services purchased on credit.

Receivables Days

The average number of days it takes for a business to collect payments from its customers.

Payables Days

The average number of days it takes for a business to pay its suppliers.

Debt Factoring

A financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount in exchange for immediate cash.

Budget

A financial plan for the future concerning the revenues and costs of a business.

Budgeting

The process by which financial control is exercised in a business, wherein budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances.

Variance

The difference between actual and budgeted figures, which can be favorable or adverse.

Breakeven Output

The level of output at which total revenues equal total costs, resulting in neither profit nor loss.

Margin of Safety

The difference between actual output and breakeven output, indicating how much sales can decline before the business incurs a loss.

Contribution per unit

The difference between the selling price per unit and the variable cost per unit, representing the amount each unit contributes towards covering fixed costs and generating profit.

Bank Loan

A fixed sum of money borrowed from a bank, typically repaid with interest over a set period.

Bank Overdraft

A short-term, flexible borrowing facility that allows a business to withdraw more money than it has in its account, up to an agreed limit.

Retained Profits

Profits that a company has earned and not distributed as dividends, which can be reinvested in the business.

Share Capital

Money raised by a company through the issue of shares.

Venture Capital

Funding provided by investors to startup companies and small businesses with perceived long-term growth potential.