3. 5 11 Solving Cash Flow Problems Improving Cash flow: Increasing Inflows • Increase / reduce selling price – depends on accurate PED data. How will consumers react? • Increase marketing – Will incur extra costs? • Refuse to offer trade credit – Impact on customer service • Arrange an overdraft – potentially with a high interest rate • Sell equity in the business – loss of control of decision making • Take out a bank loan – may not be suitable for short term problems Improving Cash flow: Reducing Outflows • Ask for trade credit – May incur an interest payment or penalty • Reduce stock levels – Business may not be able to meet unexpected changes in demand • Reduce raw material costs – Impact on quality • Cut advertising – Impact on sales revenue • Scale back expansion plans – Reduce potential future revenues

3.5 8 Budgets - variance analysis Variance analysis is the process if comparing the budget to the actual financial performance of the business. A variance occurs when there is a difference between the budgeted figure and the one actually achieved. Positive variances lead to greater profits than were anticipated (Less sales revenue or spending more money, or both) Adverse variances lead to lower profits than were anticipated

3.5 7 Budgets A monetary target set to enable a business to achieve their corporate objectives. A budget can be: • Expenditure – amount to be spent • Income – amount to be received • Profit – amount to be surplus required from sales revenue after all expenses have been paid Why set budgets? • Provides clear targets for the company, teams and individuals • Motivational for staff • Allows purchasing decisions to be made by the experts in the area • Enhancing credibility of a business plan (i.e. helps to gain investment) • Allows for performance to be reviewed through variance analysis What are see difficulties in setting budgets? • Reliant on accurate data – market research / sales data etc. • Reliant on the skills of the entrepreneur • Unforeseen changes in external environment • Changes in costs • Competitor actions • Time consuming and expensive – opportunity cost

3.5 6 Influences on Financial Objectives Internal influences: • Corporate objective – Growth? Consolidation? • Finances available – retained profit vs. debt capital • Marketing – Diversification and growth vs. survival • Operations – cost cutting vs. capital investment • People – workforce flow and planning – recruitment, training and outflow External influences: External influences: • Political – changes to government policy like education may mean businesses need to invest more in training its staff • Economic – changes in interest rates can have a huge impact on a business’s debt as loans can go up Consumer confidence will affect revenues • Social – changes to shopping habits, including the move to online, require businesses to be more flexible • Technological – advances in technology require investment, but can cut a businesses’ cost • Legal – adhering to changes in legislation, such as the minimum wage, can be costly • Environmental – cutting waste and become more efficient can help a business to manage their costs • Competitors – the competitiveness of the industry determines revenues and costs

3.5 5 Capital Structure Objectives 3.5 5 Capital Structure Objectives (Capital structure as a financial objective) Capital Structure • Long term funding is also known as ‘capital employed’, and it shows where a business has got its money from • Capital employed include share (equity) capital, debt capital and retained profits • Share (equity) capital is money invested by shareholders. • Debt capital often comes from banks in the form of loans and mortgages, and needs to be repaid The proportion of long-term funding that is debt: Debt capital / Total capital employed * 100 Total capital employed: £100,000 Share (equity) capital: £55,000 Debt capital: £45,000 £45,000 / £100,000 * 100 = 45% funded by debt • Also known as ‘gearing’ o This is a measure of risk, because the more debt that has been used to fund the business, the more the business is vulnerable to changes in the interest rate etc. o Generally, anything over 50% is considered as ‘highly geared’ and that business would be seen perhaps as a high-risk business to invest in by shareholders. o On the other hand, some investors may consider a business as too risk-free and not ambitious enough when they have not borrowed enough money. Anything less than 20% they haven’t borrowed any money. Why did they not borrow money to expand? Are the managers worried they can’t pay it back? Debt capital: predominantly banks (but also crowd-funding)

3.5 4 Return on Investment Objectives 3.5 4 Return on Investment Objectives Definition of investment: An investment is expenditure by an organisation on resources that will enable the business to achieve its objectives. Factors determining investment levels: • Management attitude to risk (Google are open and have invested in a lot) • Market conditions (are customers spending a lot, or not worth it if tough market conditions) • Competitors’ actions (feel more compelled to invest in a business if the competitors are doing so) • Level of retained profit (the more retained profit, the more ability a company has to invest money ‘risk-free’ because it doesn’t have to borrow money or try to raise it by selling shares • Interest rates / availability of other external finance • Expected rate of return on investment (how quickly will it take for an investment to be paid back) Investment appraisal: Techniques used to evaluate the financial aspects of investment projects. (Part of due-diligence) Managers will have investment appraisal is a process that managers use to compare the costs of an investment to the expected revenues it will accrue The return on investment formula: Return on investment (revenue – cost of investment) / total cost of investment x 100 Expected revenues = £60,000 Cost of investment = £50,000 ROI = £10,000 £10,000 / £50,000 x 100 = 20% Over simplified, doesn’t take into account time (i.e. does it take 10 years? Inflation etc. time to train staff)

3.5 3 Financial Objectives 3.5 3 Financial Objectives • Revenue objectives: goals relating to the level of income from sales • Cost objectives: goals relating to the expenditure for production • Profit objectives: goals relating to the amount of profit achieved • Cash flow objectives: goals relating to the ability of an organisation to fund its day to day operations (more important in short-term than profit) • Investment objectives: goals relating to the amount invested in corporate development strategies (i.e. the purchase of new equipment) • Return on investment objectives: goals relating to the level of profit to be achieved by each investment • Capital structure objectives: goals relating to the extent the business is financed internally, or by debt

3.5 2 Setting Financial Objectives Financial objectives: The specific goals set in relation to the management of an organisation’s monetary resources that will enable a company to achieve its corporate objectives. • Well set financial objectives contribute to the achievement of corporate objectives • Sets clear budgets, allowing for decisions to be made about resource allocations • Creates clarity and purpose • Allows success to be measured and reviewed • Enables the business to secure external finance, for example bank loans or investment

Marketing Mix – Promotion – Promotional Mix Promotion The part of the marketing mix that involves communicating with potential customers in order to persuade them to purchase Promotional mix Definition: The combination of activities (advertising, merchandising etc.) that a business undertakes in order to communicate to potential customers Promotion has four functions (AIDA) – Awareness, Interest, Desire, and Action • Attention/Awareness - The consumer becomes aware of a category, product or brand (usually through advertising) • Interest - The consumer becomes interested by learning about brand benefits & how the brand fits with lifestyle • Desire - The consumer develops a favourable disposition towards the brand. • Action - The consumer forms a purchase intention, shops around, engages in trial or makes a purchase ‘Above the Line’ promotion (Paid media outlets) Tends to be promotion that an organisation pay an outside organisation to do for them, specific advertising agencies that create a TV advert for them etc. This is paid for communication in the independent media e.g. advertising on TV or in the newspapers. Pros: Mass appeal, huge coverage. Cons: Though it can be targeted, it can also be seen by anyone outside the target audience. • Advertising – TV, radio, newspaper, billboards ‘Below the line’ promotion: (Activities that the firm carries out directly themselves) This concerns promotional activities where the business has direct control over the target or intended audience. Non-paid media avenues. • Public Relations (PR) • Direct selling • Sales promotion • Merchandising • Sponsorship • Leaflets, fliers etc. • E-marketing Advertising https://www.tutor2u.net/business/reference/advertising A promotional mix that involves the use of media to communicate a message to potential customers Public Relations (PR) A promotional method that involves communicating with the free media to gain publicity PR covers a broad series of activities where a business manages its relationships with different parts of the public, e.g. customers, the media, local communities, suppliers, employees and investors. Positive reflection on the brand. • Opening events/ launch nights • Press releases Direct selling A promotional method that uses an individualised approach to gaining sales • Telesales • Direct mail • Sales reps coming door to door (some people might find it intrusive) Merchandising (1) Point of sales promotion: A promotional method that involved presenting products at the point of sale to generate interest (placement by the tills etc.) (2) Promoting business through production of paraphernalia with your business logo or name on it. Promotional pens etc. and spreads message about its business and E-marketing A promotional method that involved websites or email to generate sales Internal factors influencing the promotional mix • Brand image: promotional decisions should help to create and reinforce the brand image • Nature of product: different forms of promotion will be required for different types of product i.e. mass vs niche products • Finance: the budget available • Stage of the product life cycle: products at the launch may require more informative advertising, persuasive advertising may be needed later • Marketing mix: the promotional mix should support an integrated marketing mix External factors influencing the promotional mix • Competition: businesses in highly competitive markets may spend more on promotion • Legislation: the advertising standards authority (ASA) regulates advertising • Target market: different groups of consumers will respond to different methods of promotion. For example, younger people e-marketing, older people newspaper Sales promotion • Buy 1 get 1 free or 25% off etc. o Short- term sales promotion, to try to make product more attractive to customers. Try for the first time and perhaps repurchase in the future Sponsorship is a specialised kind of public relations and increasingly popular, particularly with larger businesses. A business will sponsor an event, team or individual in order to build brand awareness. A secondary objective might be to emphasise social or ethical credentials, but most sponsorship really does have a commercial objective at heart.

Marketing Mix –Promotion – Branding (AQA placed under Promotion on the syllabus, but branding is an outcome of all the elements of the marketing mix) But branding can be created through Promotions. Definition: The process of deliberately creating an identity for a business or product that is distinctive and is a source of competitive advantage. It makes a business synonymous. Psychological response by looking at a brand logo (unconscious associations) The advantages of having a strong brand are: • The brand owner can usually charge higher prices, especially if the brand is the market leader • Erect barriers to entry • Retailers or service sellers want to stock top selling brands. With limited shelf space it is more likely the top brands will be on the shelf than less well-known brands. • Create differentiation / a source of USP / competitive advantage • Can lead to price inelastic demand • Brands inspire customer loyalty leading to repeat sales and word-of mouth recommendation • More likely to attract new customers • Improves recruitment • People want to work for a well-known company and in turn companies can attract talented recruits • Can help product development • Know us in one market so more willing to try us out in another Restrictions: • Difficult to change brand image • Expensive to create brand image • Difficult to control brand image Some retailers use "own-label" brands, where they use their name of the product rather than the manufacturers like Tesco's "Finest" range of meals and foodstuffs. These tend to be cheaper than the normal brands, but will give the retailer more profit than selling a normal brand. Some brands are so strong that they have become global brands. This means that the product is sold in many countries and the contents are very similar. Examples of global brands include: Microsoft, Coca Cola, Disney, Mercedes and Hewlett Packard. The strength of a brand can be exploited by a business to develop new products. This is known as brand extension – a product with some of the brand's s characteristics. Examples include Dove soap and Dove Shampoo (both contain moisturiser); Mars Bar and Mars Ice Cream Brand stretching is where the brand is used for a diverse range of products, not necessarily connected. E.g. Virgin Airlines and Virgin Cola; Marks and Spencer clothes and food. The logo on a product is an important part of the product. A logo is a symbol or picture that represents the business. It is important because it is easy to recognise, establishes brand loyalty and can create a favourable image.

Marketing Mix – Price – Pricing Decisions Price: A component of the marketing mix that concerns the amount that is paid for a good or service (NOT Cost: Any expenditure incurred in generating sales value) Pricing strategies: The methods used by an organisation to price a product in order to achieve their marketing objective There are three main approaches a business takes to setting price: • Cost-based pricing Price is determined by adding a profit element on top of the cost of making the product. o Cost-plus pricing • Customer-based pricing Where prices are determined by what a firm believes customers will be prepared to pay o Prime skimming - setting a high initial price for a product to maximise sales o Price penetration – “special offer” to increase market share o Predatory pricing – attempt to eliminate competition o Loss leading pricing - priced below cost in order to attract consumers into a shop o Psychological pricing - customer believe the product is cheaper than it really is o Discrimination pricing - charges different price to different groups of consumers • Competitor-based pricing Where competitor prices are the main influence on the price set  going-rate pricing –in line with the prices charged by direct competitors Cost based pricing This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used. After all, customers are not too bothered what it cost to make the product – they are interested in what value the product provides them. Cost-plus (or "mark-up") pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional £50 of profit on top of the unit cost of production. Unit cost £100 Mark-up 50% Selling price £150 How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers. In the UK a standard retail mark-up is 2.4 times the cost the retailer pays to its supplier (normally a wholesaler). So, if the wholesale cost of a product is £10 per unit, the retailer will look to sell it for 2.4x £10 = £24. This is equal to a total mark-up of £14 (i.e. the selling price of £24 less the bought cost of £10). The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. If the mark-up percentage is applied consistently across product ranges, then the business can also predict more reliably what the overall profit margin will be. Cost plus pricing: Setting a target for the profit margin on each unit, and basing the selling price on the cost of production (i.e. basing selling price on cost of production for example 10%) Suitable when a business has a degree of a monopoly power i.e. when the business has a degree of power over consumers because its lack of competition in the market Pros: Can help ensure the producer meets their unit profit targets for each sale Cons: Does not take into consideration the preference of consumers or their competitors Customer-based pricing Penetration pricing You often see the tagline "special introductory offer" – the classic sign of penetration pricing. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon. Price skimming Skimming involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition – usually due to some technological features. Such products are often bought by "early adopters" who are prepared to pay a higher price to have the latest or best product in the market. Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3. There are some other problems and challenges with this approach: Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone or iPod). Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming. A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest. Price skimming (strategy to maximise sales) Pricing strategy whereby businesses are setting a high initial price for a product to maximise short term returns (sales revenue), before dropping the price to attract a wider market. This is often seen with electronic products such as mobile phones or game consoles which are often first released at a very high price because the business knows there are certain consumers who will pay that premium price. Pros: Allows the business to gain a ‘premium price’ from those customers who are prepared to pay it Cons: Setting the initial price too high may put off too many consumers Price penetration (often used for penetrate mass market products) Setting a low initial price in order to attract attention and gain market share, before raising price periodically in the future (‘Special Introductory offer’). This is often seen with gyms when they first open to attract new users. It is used because customers are already brand loyal, so we need to give them a reason why to swap a product. They might buy product in addition to other product to try or they might just buy the product instead. Pros: A strategy for gaining interest and market share Cons: Consumers may be unwilling to pay a higher price at a later stage (psychological anchor) Loss leaders The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. But does this strategy work? Pricing is a key competitive weapon and a very flexible part of the marketing mix. If a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using a loss leader can help drive customer loyalty. One risk of using a loss leader is that customers may take the opportunity to "bulk-buy". If the price discount is sufficiently deep, then it makes sense for customers to buy as much as they can (assuming the product is not perishable). Using a loss leader is essentially a short-term pricing tactic for any one product. Customers will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often. Predatory pricing (note: this is illegal) With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Process of setting an artificially low price for a product in order to drive away competition. It is deemed illegal by the UK and European competition authorities. Predatory pricing is the act of setting prices low in an attempt to eliminate the competition. Predatory pricing is illegal under anti-trust laws, as it makes markets more vulnerable to a monopoly Firms who are confident that they can drive other firms out of the market place. Businesses might sell their products at a very low levels assuming rivals might be able to match in the short-term but not able to sustain as long as we are. A sign of predatory pricing can occur when the price of a product gradually becomes lower, which can happen during a price war. This is difficult to prove because it can be seen as a price competition and not a deliberate act. Psychological pricing Sometimes prices are set at what seem to be unusual price points. For example, why are DVD's priced at £12.99 or £14.99? The answer is the perceived price barriers that customers may have. They will buy something for £9.99, but think that £10 is a little too much. So a price that is one pence lower can make the difference between closing the sale, or not! The aim of psychological pricing is to make the customer believe the product is cheaper than it really is. Pricing in this way is intended to attract customers who are looking for "value". Competitor-based pricing If there is strong competition in a market, customers are faced with a wide choice of who to buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service. But customers will certainly be mindful of what is a reasonable or normal price in the market. Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors. They tend to use "going-rate" pricing – i.e. setting a price that is in line with the prices charged by direct competitors. In effect such businesses are "price-takers" – they must accept the going market price as determined by the forces of demand and supply. An advantage of using competitive pricing is that selling prices should be line with rivals, so price should not be a competitive disadvantage. The main problem is that the business needs some other way to attract customers. It has to use non-price methods to compete – e.g. providing distinct customer service or better availability. Within the competitive pricing exists the: Price takers • Price takers accept the ruling market price and sell each unit at the same price. AR=MR. We find price takers in perfectly competitive markets. Price makers • Price makers are found in imperfectly competitive markets such as Monopoly & Oligopoly • Price makers have some pricing power and will face a downward sloping AR curve An oligopoly market has a small number of relatively large firms that produce similar but slightly different products. Again, there are significant barriers to entry for other enterprises. In a monopoly, the seller charges high prices for the goods because there is no competition Competitive pricing is setting the price of a product or service based on what the competition is charging (in line with competitors) This pricing method is used more often by businesses selling similar products, since services can vary from business to business, while the attributes of a product remain similar. By taking price out of the equation when consumers are making their purchasing decision, it causes consumers to base their purchasing decision on other aspects of marketing such as the quality of the product, the place strategy, the promotion etc. Pros: Ensures that your price is in line with that of competitors Cons: Price is not a source of differentiation, nor does it take your costs of production into consideration Very slim profit margin or perhaps even a loss if you haven’t taken the cost of production into consideration What is price discrimination? Price discrimination happens when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply.