Buisness Decision making to improve finances

Cash-Flow forecast

Businesses can use cash-flow forecasts to estimate their total cash inflows and their total cash outflows for a future period of time.

Cash flow problems

A buisness may be profitable but may lack to short term money to pay short term loans causing bankruptcy

How to improve cashflow

By asking for a longer trade credit period (reducing how quick they get the product) or asking for shorter trade credit period (increasing how quick they get the product)

Revenue Budgets

Forecasts estimated revenue at a period if revenue is higher than forecast this is Favourable variance, if lower its Adverse variance

Expenditure budgets

Forecasts estimated Expenditure at a period if Expenditure is higher than forecast this is Adverse variance, if lower its Favourable variance

Profit budgets

Revenue and expenditure budgets can be used to make profit budgets if higher forecast is favourable, if lower adverse

Break-Even Analysis

Businesses can use breakeven analysis to predict the level of output at which total costs and total revenues will be the same.

Contribution per unit

Used in break even analysis, and is the amount of revenue which contributed to fixed costs after variable costs are taken away from revenue per unit.

Calculation contribution per unit?

Selling price per unit - variable costs per unit

Total contribution

Is the amount of revenue that contributed towards fixed costs in ALL products

Profitability Analysis

Businesses can analyse their profitability using gross profit, operating profit, and profit for the year objectives.

Gross proftt

Amount of profit left after cost of sales in deducted

Operating profit

Amount of profit left over after cost of sales and expenses have been deducted

Direct costs

Costs of sales

indirect costs

Expenses

Calculating Profit margins

Profit/Revenue x 100

Financial Goals

Cost, Revenue and profit

Financial Objectives

ROI and Long-term funding

ROI formula

profit of investment/cost of investment x 100

Debt A/A*

Debt is a form of external finance. It can be in the form of a bank loan or selling bonds. It is usually easier for established businesses with more tangible or physical assets to raise debt.

Internal finance

Finance raised from within a business

External finance

Finance raised from external sources outside a business

Diversification A/A*

Used by businesses through diversifying their services or products in a different market, making them less likely to go bankrupt as they have multiple products that can stand it if one falls. Making them less risky to banks to lend loans to, resulting in lower cost of debt.

Bonds

type of loan made by investors to businesses (or governments). When a business issues bonds, it is borrowing money from the public which is then paid back under certain agreements.