Financial and Non-Financial Analysis, Planning and Decision Support
What you must understand
Financial analysis: use ratios purposefully - profitability (gross, operating, net margin, ROCE), liquidity (current, quick, cash cycle), efficiency (receivables/payables days, inventory turnover), gearing (debt/equity, interest cover). Know that ROCE decomposes into margin × asset turnover. Understand limitations: historical cost, creative accounting, industry comparability, and the difference between profit and cash.
Decision support: relevant costing (ignore sunk costs, include opportunity costs and incremental cash flows), break-even and contribution, NPV for long-term decisions (discount incremental after-tax cash flows at the WACC), and sensitivity analysis to test assumptions. Know the balanced scorecard (financial, customer, internal process, learning and growth) and KPIs vs CSFs.
Planning: budgets as control and coordination devices; incremental vs zero-based budgeting; variance analysis distinguishing planning and operational variances.
Traps
- Using profit instead of cash flow in an NPV.
- Including allocated fixed overhead in a relevant-cost decision.
- Quoting a ratio without interpreting it against trend, competitor or plan.
- Treating a favourable variance as good when it signals quality problems or underinvestment.
Worked rule of thumb
Before any numerical recommendation, state the decision criterion (e.g. positive NPV at the WACC), compute the incremental cash flows, and then add the non-financial factors the numbers omit - strategic fit, risk, stakeholder impact. Marks sit in the interpretation, not the arithmetic.