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

2. 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

3. 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

4. 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

5. 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

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

7. 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)

8. 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 ?
Material Costs 5, ,000 ?
Labour Costs 3, ,400 ?
Overheads ,000 ?
Net Profit 1, ,600 ?

9. FINANCIAL DECISION MAKING PROCESS
Q2: Solution

10. 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