Selecting Financial Strategies Financial Strategies Cost minimisation Raising

Selecting Financial Strategies

Financial Strategies �Cost minimisation �Raising finance �Introducing & implementing cost & profit centres �Allocating capital expenditure

Cost minimisation �How can a company cut costs? �TASK There have been plenty of examples during the recession – research some of the methods that companies have used & feedback to the rest of the group (10 minutes)

Cost-minimisation �Cut direct costs �Reduce overheads �Target functional areas �Impact must be fully considered

Raising Finance �Internal v. External �Short-term v. Long-term

Internal Sources �Retained profit (or trading profit) �Sale of assets �Sale & leaseback

External sources �Ordinary share capital �Loan capital �Debentures �Bank loan �Bank overdraft �Venture capital �Business angels

Internal or external? �Legal structure of business �Use of finance �Amount required �Firm’s profit levels �Level of risk �Views of the owners

Profit centre �An identifiable part of an organisation (e. g. a department, product, or branch) for which costs & revenue, and thus profit, can be calculated

In favour of profit centres �Focused study of firm’s finances �Benchmarking can take place �May motivate �Increased efficiency

Against profit centres �Allocating costs �May demotivate �Diseconomies �Target-setting may be too haphazard

Capital v. Revenue expenditure �Time span is key �Capital expenditure �Spending on items that can be used time and time again (non-current assets) �Long-term source of finance �Revenue expenditure �Spending on current, day-to-day costs �Short- or medium-term source of finance

Capital expenditure �Buying fixed assets �Delivery, installation & any cost associated with preparing an asset to be used in business �Restoring property or adapting or enhancing it to a new or different use �Improving the capabilities of machinery and equipment �Ideally should improve business efficiency

Allocating capital expenditure �Introduce capital equipment to replace labour �Investment decisions on whether it is financially viable to put money into a capital project

Methods of allocation �Simple method – all functional areas have an equal share �Allocation on an agreed basis – functional areas discuss/agree sensible share �Allocation on a rotating basis – every few years, each area received an enhanced amount for upgrades �Zero allocation

Zero allocation �Best but most complicated system �Each functional area initially received no allocation �Each area must demonstrate and justify what capital expenditure they would need based on their objectives and plans for the next financial year �What are the advantages & drawbacks?

Advantages?