Financial chains of analysis

• : Explain how a business might benefit from knowing that demand for its product is price inelastic.

  If demand is price inelastic, an increase in price→ will lead to a less than proportionate fall in quantity demanded→ meaning total revenue will rise→ which can improve profit margins→ and provide funds for reinvestment or expansion.
• Q2: Assess the impact on revenue if a firm with elastic demand reduces its prices.

  If demand is elastic, a price decrease→ leads to a more than proportionate increase in quantity demanded→ which means total revenue rises→ improving cash inflows→ which can be used to finance operational costs or marketingHowever, if the firm cannot meet higher demand, costs may rise and erode profits.
• Q3: Analyse why a business selling a luxury good might experience elastic demand.

  Luxury goods are not necessities and have many alternatives

  → so a small increase in price leads to a large fall in quantity demanded

  → making demand price elastic

  → which limits the business’s ability to raise prices

  → and makes revenue more sensitive to pricing decisions.
• Q4: Explain one reason why a product may have price inelastic demand

  If the product is a necessity (e.g. medicine)

  → consumers are less responsive to price changes

  → because they need the product regardless of cost

  → leading to price inelastic demand

  → giving the business more control over pricing without major revenue loss.
• Financial Objectives

  Common objectives:

  • Revenue, profit, and cost objectives
  • Cash flow targets
  • Return on investment (ROI)
  • Capital structure goals

  Influences:

  • Corporate objectives, internal/external environment, shareholder expectation
• Revenue, Costs, and Profit

  Revenue = Selling Price × Quantity Sold

  Total Costs = Fixed Costs + Variable Costs

  Profit = Total Revenue – Total Costs

  • Gross Profit: Revenue – Cost of Sales
  • Operating Profit: Gross Profit – Operating Expenses
  • Net Profit: Operating Profit – Interest & Tax
• . Break-even Analysis

  Break-even Output = Fixed Costs ÷ Contribution per Unit

  • Contribution per Unit = Selling Price – Variable Cost per Unit

  Margin of Safety = Actual Sales – Break-even Sales

  Helps assess risk and plan output levels
• Cash Flow

  Cash inflows vs. outflows over time

  Cash Flow Forecasts: Predict liquidity problems

  Key terms:

  • Opening Balance, Net Cash Flow, Closing Balance

  Solutions to cash flow issues:

  • Delay payments, speed up inflows, short-term finance
• Budgets

  Types:

  • Income budgets, Expenditure budgets, Profit budgets

  Purpose: Planning, control, monitoring

  Variance Analysis:

  • Favourable (F): Better than expected
  • Adverse (A): Worse than expected
• 6. Financial Ratios

  Gross Profit Margin = (Gross Profit / Revenue) × 100

  Operating Profit Margin = (Operating Profit / Revenue) × 100

  Net Profit Margin = (Net Profit / Revenue) × 100

  ROCE = (Operating Profit / Capital Employed) × 100

  • Indicates efficiency in generating returns
• 7. Sources of Finance

  • Internal: Retained profit, sale of assets
  • External: Bank loans, overdrafts, share capital, venture capital, trade credit
  • Short vs. Long-Term Finance based on purpose and repayment time
• . Use of Data in Decision-Making

  • Interpreting financial accounts
  • Forecasting trends and performance
  • Limitations: Data reliability, future uncertainty, changing market conditions