5 Corporate/Financial Objectives, Profit & Cash Flow Flashcards
Corporate Objectives Examples
positive culture ‘right first time’
maximise profits & minimise costs
maximise sales
increase labour productivity
meet needs of customers/stakeholders
expansion/growth/diversification
survival
cash flow management
corporate social responsibility
Capital Structure
The finance provided to a business to enable it to operate in the long-term. The balance of the finance in terms of how much equity (share capital), and how much in the form of debt.
Equity
The capital provided by shareholders, including share capital invested into the business or retained profit (rather than paid out as dividends).
Debt
Outstanding payments the business has yet to pay out to suppliers or other benefactors: long-term business loans or mortgages/debentures.
Gearing and Capital Structure
Examining the relative mix of debt capital as compared with the total capital employed by a business.
What makes a good business?
One that at least meets its financial projections and CSR objectives.
Purpose of Corporate Objectives
Focuses the firm to meet their objectives/aims. Provides strategic direction within each function. Impacts upon other functions therefore must be co-ordinated.
Financial Objectives
Goals or targets pursued by the finance department. Must be SMART to be effective.
Financial Objectives Examples
Return on investment & return on equity (money made from capital used).
Revenue, Costs & Profits (money made from items sold).
Cash Flow (cash available when business is pursued).
Investment (investment of capital required).
Capital Structure (proportion of long-term funding that is debt’gearing’.
SMART
Specific Measureable Agreed Realistic Time-Specific
Revenue Equation
Price x Quantity Sold
Revenue
The money that is gained by selling goods/services within a trading period.
Total Costs
Fixed Costs + (Variable Cost per Unit x No. Units)
Average Costs
Total Costs / No. Units
Opportunity Costs
The money that is forgone as a result of an alternative decision.
Fixed Costs Example
salaries
rent
insurance
Variable Costs Example
wages
raw materials
packaging
Profit
Money made excluding costs, can be increased by raising revenue or minimising costs. Records all transactions in and out (including those at some point in the future). Different to cash flow due to the treatment of investment (depreciation of assets).
Uses of Profit
Retained Profit
Dividends for Shareholders
Benefits of Setting Financial Objectives
Performance Indicator
Acts as focus/direction for decision-making
Enables financial performance comparison (over time)
Identify problem areas so action can be taken
Assess effectiveness of financial strategies
Motivates Employees
Avoiding Obvious Hazards in relation to cash flow
Measure success for investors
SHAREHOLDER Needs
wants tor receive dividends when profits are high, as they are not a legal requirement, must have good ROI
EMPLOYEES Needs
retain jobs, job security, not being made redundant, high profits mean an improvement in working conditions, potential pay rise
FINANCIERS Needs
high profits made on loans paid back with interest, on time and in full
SUPPLIERS Needs
paid on time and in full, high profits mean an increased demand for supplies
CUSTOMERS Needs
high profits may result in lower prices or an improvement in overall design
GOVERNMENT Needs
affects GDP of country, high profits means higher corporation taxes
Cash Flow
The money held within a business in the short-term that it is able to use to pay debts. The money flowing in/out over a period of time.
What happens when a business is unable to pay its debts?
It becomes insolvent due to the inability to pay short-term debts.
Window Dressing
The process of stalling payments to suppliers to appear more profitable and mislead stakeholders, inciting more people to invest.
What happens when a firm sells goods on credits?
On the income statement it would be recorded as revenue, and therefore make the firm appear profitable at the end of the financial year. It will have not yet been received as cash, meaning they would be unable to use it to pay its short-term debts.
Cash Inflows Examples
when owners invest/take out loans/use overdrafts
when customers pay for goods/services
sales of fixed assets (vehicles,property,machinery)
Cash Outflows Examples
when suppliers/employees are paid
overheads (rent, insurance, fuel, telephone bills) are due
when loans and overdrafts are repaid
Net Cash Flow
Total Cash Inflow - Total Cash Outflow
(negative when inflow<outflow)
Reasons for a business to appear profitable but have poor cash flow/liquidity:
Sales made on credit will be agreed and paid at a later date (sale will count immediately as revenue but will not become an inflow until cash is paid in); Payments for goods from suppliers will show as a cost, will not be a cash outflow until cash is paid out; Purchased stock appears as an asset, cash is tied up within in.
Income Statement
A record of a specified trading period, records all sales revenue and all relevant costs incurred, shows the resultant profit or loss.
Gross Profit
Sales Revenue - COGS (Direct Costs)
Direct Costs
Costs directly associated with manufacturing and selling, the expenditure that can be clearly allocated to a particular product/area of the business.
Direct Costs Example
Raw materials
Labour (wages/commissions)
Utilities for production site
Shipping
What is gross profit used for?
Giving a broad indication of the performance of the business’ core activity - selling goods and/or services without taking into consideration indirect costs (overheads).
Operating Profit (EBIT) Definition
Financial surplus arising from a business’ trading activities before taxation. Excludes taxation on profits, interest on loans, income from one-offs, profits from joint ventures.
Operating Profit
Gross Profit - Operating Expenses (direct and indirect costs)
[Sales Revenue - (Direct + Indirect Costs)]
Profit for the Year Definition
Takes into account all income from all sources/full range of costs incurred including taxes on profit and interest charges.
Profit for the Year
Operating Profit - Net Interest - Taxation
How can profit be used?
Retained Profit used for growth/saving for future investments.
Distribution - keeping shareholders happy as a ROI.
Revenue Objectives
Setting a certain amount of revenue to be achieved within a set time period.
Examples of Revenue Objectives
Establishing business within market (through omnichannel distribution)
Building customer base
Help to achieve growth
Maximise short-term selling opportunities
Maximise donations (charities)
Cost Objectives
Including reducing costs over time, especially compared to competitors, cost minimisation (budget businesses).
Delayering
Process that involves removing layers of management to reduce costs, may result in negative publicity or brand image from redundancies.
Profit Objectives
Through a different level of profit (an increase of £1.5 mill); Percentage Increase in profit levels (15%); As a percentage compared to sales in a profit margin (5.2%).
Purpose of Profit Objectives
Motivate staff giving a clear goal to aim toward. However, may cause disadvantages if a business experiences an unexpected drop in profits, causing negative publicity and a drop in share price.
Cash Flow Objectives
Maintaining a min. closing monthly balance.
Improving inflows
Minimising outflows
Reducing reliance on bank overdrafts (to minimise interest payments)
Spreading out payments evenly throughout the year
Improving liquidity by holding less stock and improving credit terms with suppliers/customers.
