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(Mine) Business. > 3.5.1 Setting financial objectives. > Flashcards

3.5.1 Setting financial objectives. Flashcards

1
Q

Define a financial objective.

A

The specific, focused aims or goals of the finance and accounting function or department within an organisation.

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2
Q

Outline the type of financial objectives.

A

Revenue.
Cost.
Profit.
Cash flow.
investment (Capital expenditure) levels.
return on investment.
Debt as a proportion of long-term funding.

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3
Q

Outline some benefits for setting financial objectives.

A

Yardstick for success or failure.
Improved co-ordination.
Improved efficiency.
etc.

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4
Q

Outline some difficulties using financial objectives.

A

Difficult to be realistic.
External changes beyond the businesses control.
Difficult to measure some accurately.
etc.

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5
Q

Outline the formula for return on investment.

A

Return on investment (%) =

return on investment* / cost of the investment x 100.

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6
Q

Outline the formula for return on investment.

A

Financial gains from the investment - costs of the investment.

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7
Q

Define investment.

A

Items that are purchased by firms because they help them to produce goods and services.

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8
Q

Define return on investment.

A

A measure of the efficiency of an investment in financial terms, used to compare the financial returns of alternate investments.

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9
Q

What do return on investments enable a business o see.?

A

Financial returns on alternative investments.

Trends in financial performances.

Changing levels of return for certain activities.

Etc.

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10
Q

Define debts:

A

Money owed by an individual or organisation to another individual or organisation.

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11
Q

Define long term funding.

A

Money provided to a business that does not require repayment within a year.

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12
Q

Outline debt as a proportion of long-term funding.

A

A business should balance its long term funds between funds provided by shareholders and debts arising from loans.

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13
Q

Outline the formula for debts as a proportion of long term funding.

A

Debts / long term funding x 100.

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14
Q

What are the problems provided by debts:

A

Interest payments on the debts.

The full amount of the loan must be repaid by an agreed debt.

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15
Q

Does share capital need to be repaid?

A

No, dividends can be reduced or cancelled if necessary. If a profit is made, shareholders will usually expect a dividend higher than the interest rate charged by the bank.

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16
Q

Define profit.

A

The difference between the total revenue of a business and its total costs.

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17
Q

Define cash flow.

A

The amount of money flowing into and out of the business over a period of time.

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18
Q

Define cash inflows.

A

Receipts of cash.

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19
Q

Define cash outflows.

A

Payments of cash.

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20
Q

Define net cash flow.

A

Cash inflows - cash outflows.

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21
Q

Why may profitable firms be short of cash?

A

Built up inventory levels, the wealth will lie in its assets rather than cash.
If a firms sales are on credit, its wealth will be in debtors rather than cash.

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22
Q

What may a lack of cash lead to?

A

Sales will be lower than expenditure, creditors and investors will be reluctant to give credit or loans, leading to liquidation.

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23
Q

What does liquidation mean?

A

Selling its assets to make cash payments, therefore the firm will close.

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24
Q

What is gross profit?

A

Revenue - cost of sales.

Excluding overheads.

25
Q

What does the cost of sales consist of?

A

Items of expenditure directly related to the provision of a business’s products - wages, raw materials, and inventory.

26
Q

What does gross profit show?

A

How efficiently a business is converting its raw materials into finished products.

27
Q

What is the calculation for operating profit?

A

Gross profit - administrative expenses.

28
Q

What is operating profit made from?

A

Trading - the main activities of a business.

29
Q

What are administrative expenses?

A

Costs associated with running a business that don’t relate to your products or sales.

30
Q

What is profit for the year?

A

Available to the owners. includes all revenue, including non-trading revenue, such as sales of assets and all expenditure, including financial costs.

31
Q

What can profit for the year be used as?

A

A useful measure for shareholders, showing how much they benefit from an ownership in the business.

32
Q

What three forms do revenue objective take?

A

Sales maximization.
Targeting a specific increase in sales revenue.
Exceeding the sales of a competitor.

33
Q

How will a business achieve its revenue objectives?

A

Relying on their marketing mix e.g.

Lowering prices to lead to an increase in sales volume.

May be able to increase sales revenue, by lowering the price if demand is price elastic, if aware of its product PED.

34
Q

Define cost minimisation.

A

Achieving the lowest possible unit costs.

35
Q

How can a business benefit from cost minimisation?

A

Keep its price the same and benefit from a higher profit margin.

Use cost reduction to reduce the selling price of its finished product and attract more customers.

36
Q

Outline examples of cost minimisation objectives.

A

Achieving a certain cost reduction in the purchase of raw materials.

Reducing wage costs per unit.

Lowering levels of wastage.

37
Q

What can cost minimisation lead to?

A

Cheaper materials lead to lower quality - take into account targeted market.

38
Q

What are the three profit targets?

A

Profit maximisation.

Targeting a specific increase in profit.

Exceeding the profit of close competitors.

39
Q

What are the disadvantages of profit maximisation?

A

Difficult to know if it has been achieved.

Can conflict with other objectives e.g. culture.

40
Q

What is an alternative to profit maximisation?

A

Increasing the profit made from last year.

41
Q

Define profit maximisation.

A

Maximising gross profit, operating profit and profit for the year.

42
Q

What are examples of cash flow objectives?

A

Maintaining a minimum closing monthly cash balance.

Reducing the bank overdraft by a certain sum by the end of the year.

Creating a more even spread of sales revenue.

43
Q

Define depreciation.

A

The fall in value of an asset over time, as it grows older, and the reduction in its economic use or its obsolescence.

44
Q

Define obsolescence.

A

When an asset is still functioning but is no longer considered useful as it is out of date.

45
Q

What are the two types of investment.

A

Replacement capital/investment.

New investment.

46
Q

What is replacement/capital investment?

A

Investment intended to replace depreciated assets, therefore not adding to the stock of capital goods.
`

47
Q

Define new investments.

A

Expenditure on new capital goods, enabling a business to increase its capacity to produce.

48
Q

What are the factors influencing investment decisions and objectives.

A

Expected return on investment.

Interest rates.

expected demand.

Levels of technological change.

availability of finance.

Business confidence.

Attitude to risk

Leve of spare capacity.

Nature of production.

Competitors actions.

49
Q

What are businesses funded by?

A

A combination of debt capital and equity capital.

50
Q

Define debt capital.

A

Borrowed funds.

51
Q

Define debentures.

A

Funding from external sources, in return for regular fixed interest payments and an agreed repayment date.

52
Q

What is an advantage of debentures?

A

They are long term.

53
Q

Define equity capital.

A

Capital provided by shareholders.

54
Q

What do shareholders receive?

A

Dividends, but sometimes they agree that profit should be retained.

55
Q

What does retained profit increase?

A

The value of the business, therefore share prices will rise and shareholders will get a gain.

56
Q

What should the capital structure match?

A

Match capital structure to the timings and inflows of cash brought about by investment plans.

57
Q

What should the business balance their finance with?

A

The level of risk.

58
Q

What is a common capital structure objective?

A

Debt to equity ratio.

(Mine) Business. (71 decks)

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