BUSS3 Chapter 5 Selecting Financial Strategies

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Teacher presentation AQA Unit 3

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Chapter 5 Selecting Financial Strategies:

Chapter 5 Selecting Financial Strategies At the end of this chapter you will be able to Explain the meaning and significance of specific financial strategies Understand how specific financial strategies interrelate with other functional areas Assess the suitability of specific financial strategies to a given context

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Setting the scene Read SOL- utions solution P32 Look at the discussion points and make notes Class discussion

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Financial Strategies The long term financial plan of action to achieve the financial objectives of the business These strategies will help a firm develop and maintain competitive advantage If a financial objective is to lower costs to the point that they are below the competitor, the strategy would be a plan of how this objective can be met

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Sources of Finance This is about the main sources of finance available to a business to fund strategic development The largest source tends to be retained profit If there is insufficient retained profit an alternative source will be required 2 main options Equity share capital Debt (loans) The main differences between these two can be seen below

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Equity Share Capital Firms can raise capital by selling shares in their company (not Sole Traders and Partnerships) If this is a private company they will decide how much capital they need and decide how much of the shares they will sell to get that capital If they are a plc the share price will be dictated by market Once the firm has this initial capital from selling shares it will not longer make money on these shares – only the owners of the shares will make money buying and selling More shares can be sold at a later date to raise more capital If the company has no more shares to release (all have been sold to the public) they can release more shares but this will reduce the share of the existing shareholders and permission will be required.

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Debt Finance obtained from banks or other financial institutions is called loan or debt capital The loan will be secured against assets (if the loan is not paid the assets will be taken) so there is less risk for the lender Interest rates are compulsory regardless of company performance A company which relies heavily on debt capital is said to be highly geared So the two main financial strategies to raise capital are by selling shares (equity share capital) or take a loan from the bank (debt capital)

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Implementing Profit Centres A strategy to increase profit is to delegate responsibility to the individual divisions/departments of the business This is where the business gives more responsibility to the divisions for profit - they have to manage their revenues and costs and reach a profit target This is a good way of management being able to see which divisions are underperforming – it is a good way of monitoring financial performance It also motivates managers The profit centres could be decided based on product, department or geographical location It is only appropriate when the subsection is in control of its revenues and costs A marketing department might be able to control its costs but it does not actually generate revenue so it would not make a good profit centre Profit Centres – a section of a business for which costs and revenues and therefore profit can be identified Complete activity on P35

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Cost Minimisation A strategy of cost minimisation will allow a business to compete on price or make larger profit margins If the costs can be reduced a lower price can be passed on to the customer Cost reduction can be achieved by Lower input costs by reducing supplier costs – if a business is the market leader they may have the power to negotiate better terms and conditions with suppliers Increase productivity Introduce a just-in-time strategy – only take resources when you need them to make goods for the customer This can put a lot of pressure on suppliers who may increase their charges which would put costs up July 2008 ‘We are currently examining with Fiat Group possibilities for the joint use of systems…to achieve economies of scale and thus cost reductions’. Mr. Eichiner CFO of BMW

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Allocating Capital Expenditure Capital expenditure is the purchase of assets that will stay in the business for a long period time Machines Delivery van Shop fittings These are seen on the company’s balance sheet where the cost is spread over the useful life of the asset Day to day spending on wages, raw materials etc are called revenue expenditure and are seen on the income statement Spending on capital items is very important and has to be controlled properly A firm will have a sign off chain so that as the amount of money required gets larger the person that has to sign it off becomes more senior Firms have to invest in new equipment or new projects to increase their shareholder’s wealth The benefits are very hard to measure because they will be achieved over a long period of time Firms also need to consider the opportunity cost If it spends money on equipment that money will not be available to train staff There will be a limited amount of capital available and the firm will have to decide how best to spend it to grow and improve future performance Capital expenditure is the purchase of assets that will stay in the business for a long period time. Seen on the balance sheet Revenue expenditure - Day to day spending on wages, raw materials etc. Seen on the income statement

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Case Study Red Square Industries pls P36 Answer all questions Complete Summary Questions Learn the key terms To be completed for homework by …………..

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