FINANCIAL DECISION MAKING PROCESS GCE PROFESSIONAL BUSINESS SERVICES AS 3 FINANCIAL DECISION MAKING PROCESS

FINANCIAL DECISION MAKING PROCESS The process of determining and selecting the most effective choice of action from a range of alternatives, in order to ensure the best outcome Key Business Objectives: Survival Profit Maximisation Growth

FINANCIAL DECISION MAKING PROCESS Decision making purposes: Investing Diversifying Expanding Exporting Increasing Employee numbers A Business Consultant is typically required to provide advice to a client in context of the above situations

FINANCIAL DECISION MAKING PROCESS FINANCIAL DATA: Budgeting Cash Flow Financial information (e.g. sales, wages, % change) Final Statements Ratio Analysis Investment Appraisal A Business Consultant is required to provide advice on a range of data sets, including some/all of the above

FINANCIAL DECISION MAKING PROCESS Ratio Analysis: Q1b: Cindy runs a beauty salon in your local town. She has asked you, as her Business Consultant for advice in reviewing key financial data related to the business. You are required to: a. Calculate the gross profit margin for each financial period. (4) b. Analyse two possible reasons for the change in gross profit margin. (6) Table 1: Financial Data - Cindy’s Beauty Salon   2016 (£) 2017 (£) Sales Revenues 19,500 20,000 Cost of sales 14,900 17,000 Gross profit 4,600 3,000

FINANCIAL DECISION MAKING PROCESS Q1b. Suggested Solution (a) 2016 2017 Gross Profit Margin £4600/£19500 x 100% £3000/£19000 x 100% GPM % 24% 16% (4)

FINANCIAL DECISION MAKING PROCESS (b) Reasons for the change in gross profit margin: Fall in sales revenues – this could be due to a loss of market share arising from a decline in quantity sold and/or an increase in sales prices which customers are not prepared to pay; Increase in costs – material costs may have increased, which results in a higher cost per unit, which in turn would depress profits. (6)

FINANCIAL DECISION MAKING PROCESS Q2: The following information was reported by the owner of a small business. You are required to calculate: (i) the net profit; and (ii) variances and explain one reason for the variance in each case: Operating Statement Budget (£) Actual (£) Variance(£) Sales 10,000 12,000 ? Material Costs 5,000 4,000 ? Labour Costs 3,000 4,400 ? Overheads 500 1,000 ? Net Profit 1,500 2,600 ?

FINANCIAL DECISION MAKING PROCESS Q2: Solution

FINANCIAL DECISION MAKING PROCESS Business Consultants need to be cautious when analysing financial data: Audit/Due diligence should take place to verify the accuracy of the data Financial data only provides a financial viewpoint – there may be non-financial issues to consider in a given situation Seasonal factors often influence the results Financial data is historical in nature and dates quickly