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3.5 Selecting Financial Strategies
- Key Terms
- Financial Strategy- A
medium to long term
plan to achieve the
financial objectives of
a business
- Investment- Major
capital expenditure
programs expected to
provide financial
returns in the long run
- Retained Profit- The part of
the profit after tax that is kept
for reinvestment rather than
being paid out to shareholders
- Sale and leaseback- Assets
such as property are sold then
immediately rented back on a
long term lease so they are still
available for use by the firm
- Public share issue- when a plc offers
shares for sale to the general public in
order to raise more capital
- Rights issue- when a plc offers shares to
existing shareholders, usually at a
discount to the current market price.
- Cost Centre- A part of an organisation for which costs can
be clearly identified eg a department, division or branch of a
business.
- Profit Centre- a part of an organisation for which costs and
revenue can be clearly identified eg a department, division
or branch of a business so its profits can be calculated.
- Offshoring- This is the relocation of part of a business
to a lower cost country eg call centres to India
- Financial Strategy- A
medium to long term
plan to achieve the
financial objectives of
a business
- Various sources of finance but they have an impact
on ownership, gearing and long and short term
profitability
- Main sources of finance
- Borrowing
- LT loans. Done quickly but
interest will be paid
- LT loans. Done quickly but
interest will be paid
- Selling Shares
- slow and expensive but no interest payments.
Shareholders expect dividends
- slow and expensive but no interest payments.
Shareholders expect dividends
- Retaining profits
- Sale of assets
- NCA that firms no longer needs/whole
division that does not fit with strategy
- NCA that firms no longer needs/whole
division that does not fit with strategy
- Borrowing
- Main sources of finance
- Profit centres split businesses into
smaller parts
- Costly and time consuming
- Useful
- Allocating revenue, costs and profits for
more accurate decision making
- Easier to monitor budgets,
targets and performance
- Decentralising decision making allows
fast more responsive decision making
- Delegating authority to profit
centres can be motivating
- Allocating revenue, costs and profits for
more accurate decision making
- Costly and time consuming
- Cost minimisation can be applied in all functions
- Minimising labour costs
- Using Technology
- Replace existing workers as firms become
more capital intensive
- Replace existing workers as firms become
more capital intensive
- Relocating
- offshoring. For labour intensive will
be for lower labour costs
- No point if quality compromised
- No point if quality compromised
- offshoring. For labour intensive will
be for lower labour costs
- Minimising labour costs
- Decisions need to be made on how capital
expenditure on NCA will be allocated
- Decisions normally have
significant opportunity cost
- Investing in technology
- reduce number of workers needed
- reduce number of workers needed
- Investing in other assets
- eg property, supermarkets
need to do this
- eg property, supermarkets
need to do this
- Decisions normally have
significant opportunity cost
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