3.5 - Finance

Question 1

What is a financial objective?

Answer 1

A specific goal or target of relating to the financial performance, resources and structure of the business

Question 2

Benefits of setting financial objectives

Answer 2

• provides a focus for the entire business
• important measure of success or failure for the business
• reduce risk of failure
• provides transparency for shareholders about their investment
• help coordinate the different business functions
• key context for making investment decisions

Question 3

What is cash flow?

Answer 3

The flow of money into and out of the business.

The difference between total cash inflows and total cash outflows over a period.

Question 4

What is profit?

Answer 4

Total Revenue - Total Costs

The difference between total revenues and total costs over a period.

Question 5

The differences between profit and cash flow

Answer 5

• timing
• the way fixed assets are accounted for
• cash flows arising from the way the business is financed

Question 6

Why is timing a difference of cash flow and profit

Answer 6

• sales to customers made on credit

- payments to suppliers

Question 7

Why is ‘the way fixed assets are accounted for’ a difference of cash flow and profit

Answer 7

• payment for fixed asset = cash outflow not a cost

- depreciation is charged as cost when the value of fixed assets is reduced

Question 8

Why is ‘cash flows arising from the way the business is financed’ a difference of cash flow and profit

Answer 8

• payments of dividends

- inflows from shareholders, bank loans

Question 9

Different measurements of profit

Answer 9

1) gross profit
2) operating profit
3) profit for the year

Question 10

What is Gross Profits

Answer 10

Sales revenue minus the cost of goods and services sold

Question 11

What are operating profits

Answer 11

Profit after running costs but before tax

Question 12

What is profit of the year

Answer 12

Profit after all costs have been accounted for, including tax.

Question 13

When a figure is in brackets on an INCOME STATEMENT, what does it mean?

Answer 13

It is a negative figure

Question 14

What is revenue on an income statement

Answer 14

Sales during a period

Question 15

What is ‘the cost of sales’ on an income statement

Answer 15

Direct costs of generating revenues go into “cost of sales”. Includes the cost of raw materials, components, good bought for resale and the direct labour costs of production.

Question 16

What is “gross profit” on an income statement

Answer 16

The difference between revenue and cost of sales. A simple but very useful measure of how much profit is generated from every £1 of revenue before overheads and other expenses are taken into account. Is used to calculate the gross profit margin (%).

Question 17

What are “administration expenses” on an income statement

Answer 17

Operating costs and expenses that are not directly related to producing the goods or services are recorded here. Includes distribution costs (e.g marketing, transport) and the wide range of administrative expenses or overheads that a business incurs.

Question 18

What is “operating profit” on an income statement

Answer 18

A key measure of profit. Operating profit records how much profit has been made in total from the trading activities of the business before account is taken of how the business is financed.

Question 19

What is “taxation” on an income statement

Answer 19

An estimate of the amount of corporation tax that is likely to be payable on the profits for the period

Question 20

What is “profit for the year” on an income statement

Answer 20

The amount of profit that is left after the tax has been accounted for. Shareholders then decide how much of this is paid out to them in dividends and how much is left in the business (“retained profits”).

Question 21

Businesses will typically set objectives related to….

Answer 21

revenue
costs
profits

Question 22

What are the 3 Revenue objectives?

Answer 22

• Revenue growth ( aiming to grow total revenue by 10% )
• Sales maximisation ( regardless if sales are profitable )
• Market Share ( grow market share to 20% - involve faster revenue growth than market competitors )

Question 23

What is Cost Minimisation?

Answer 23

Aims to achieve the most cost-effective way of delivering goods and services to the required level of quality

Question 24

Benefits of effective cost minimisation

Answer 24

• lower unit costs (competitiveness)
• higher gross profit margin
• higher operating profit
• improved cashflow
• higher return on investment

Question 25

What are the different Profit objectives?

Answer 25

1) Specific level of profit - achieve an operating profit of £1M
2) Rate of profitability (%) - achieve an operating profit margin of 10% of revenues
3) Profit maximisation - maximise total profit for the year
4) Exceed industry or market profit margins - achieve a higher gross or operating profit margin than key competitors

Question 26

Strong cash-flow means that…

Answer 26

It helps businesses achieve other financial objectives by providing extra financial resources

Question 27

What are the different cash-flow objectives?

Answer 27

• reduce borrowings to target level
• minimise interest cost
• reduce amounts in inventories (stock) or owed by customers
• reduce seasonal swings in cash-flow.