F INANCIAL S TRATEGIES AND ACCOUNTS S ELECTING F INANCIAL S TRATEGIES “Watch the costs and the profits will take care of themselves.” Andrew Carnegie BUSS3.5 Selecting Financial Strategies

S ELECTING F INANCIAL S TRATEGIES I N THIS TOPIC YOU WILL LEARN ABOUT : Raising finance Implementing profit centres Cost minimisation Allocating capital expenditure BUSS3.5 Selecting Financial Strategies

Financial Strategies Financial Objectives Cash flow targets Cost minimisation ROCE targets Shareholders’ returns Financial Strategies Raising finance Implementing profit centres Cost minimisation Allocating capital expenditure What can the business do to achieve these objectives? Long term plans of action BUSS3.5 Selecting Financial Strategies

CAN YOU DEFINE EACH OF THESE KEY TERMS? Financial Objective Financial Strategies Non-current liabilities Reserves and retained earnings Share capital Gearing Total Equity At A2 remember it is still important to define key terms at the start of an examination answer It is useful to revise these terms before continuing with this unit BUSS3.5 Selecting Financial Strategies

Sources of Finance Long term finance may be needed to fund strategic actions in a business Relocation Expansion Automation Retrenchment There are a number of possible options Reserves and retained earnings Share Capital Loan Capital Explain how the choice of long term finance will influence a business’ gearing ratio. BUSS3.5 Selecting Financial Strategies

Sources of long term finance Loan capital (debt) No loss of ownership or control Fixed repayment terms Vulnerable to fluctuations in interest rates May need to be backed by collateral Compulsory interest bearing Interest appears as a finance cost on an income statement Equity capital Shareholder is part owner who's degree of control is dependent on number of shares held No fixed repayment terms No collateral needed Dividends paid at directors’ discretion Dividends appear as a payment after tax Loan capital affects a business’ tax liability whilst equity capital does not. Use your knowledge of an income statement to explain this point. BUSS3.5 Selecting Financial Strategies

Implementing Profit Centres The process of giving individual sections of a business responsibility for its own costs, revenues and hence profits More specific objectives can be set Greater comparisons between subsections e.g. ROCE targets for individual product lines Easier to identify subsections which are under or over performing Strategies can be implemented with greater focus Profit centres can be Geographical Branches Products or services Why is it often harder to accurately allocate costs to a profit centre than revenues? Read more about cost and profit centres at Times100 BUSS3.5 Selecting Financial Strategies

Cost minimisation What strategies can a business take to minimise costs? (although this is a financial question the answer could come from any functional area or even a corporate solution) Marketing Low cost strategy Operations Management Relocation Lean production Human Resources Changing organisational structure Workforce plans Corporate Close unprofitable branches Use both your AS & A2 subject knowledge to add to these bullet points Cost minimisation is a recurring theme in BUSS3 You will need access to the internet to watch this video clip What financial strategies has Ryanair taken to achieve its objective of growth? What other factors have influenced these strategies ? BUSS3.5 Selecting Financial Strategies

Allocating Capital Expenditure Capital Expenditure The purchasing of non-current assets Often large sums of money are being invested in long term strategic projects Will effect the business’ ROCE Capital expenditure will go up but there may be a time lag before a positive effect on returns is seen Consider the opportunity cost of the capital expenditure What else could it be spent on? Where will the business source the finance to fund the capital expenditure? BUSS3.5 Selecting Financial Strategies

Activity FINANCIAL STRATEGIES AND OTHER FUNCTIONAL AREAS Financial strategies Raising finance Implementing profit centres Cost minimisation Allocating capital expenditure HR Marketing Operational Print this slide onto A4 and complete to explain the possible links between each financial strategy and other functional areas. BUSS3.5 Selecting Financial Strategies