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AQA A LEVEL BUSINESS STUDIES > 5 Corporate/Financial Objectives, Profit & Cash Flow > Flashcards

5 Corporate/Financial Objectives, Profit & Cash Flow Flashcards

1
Q

Corporate Objectives Examples

A

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

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2
Q

Capital Structure

A

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.

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3
Q

Equity

A

The capital provided by shareholders, including share capital invested into the business or retained profit (rather than paid out as dividends).

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4
Q

Debt

A

Outstanding payments the business has yet to pay out to suppliers or other benefactors: long-term business loans or mortgages/debentures.

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5
Q

Gearing and Capital Structure

A

Examining the relative mix of debt capital as compared with the total capital employed by a business.

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6
Q

What makes a good business?

A

One that at least meets its financial projections and CSR objectives.

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7
Q

Purpose of Corporate Objectives

A

Focuses the firm to meet their objectives/aims. Provides strategic direction within each function. Impacts upon other functions therefore must be co-ordinated.

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8
Q

Financial Objectives

A

Goals or targets pursued by the finance department. Must be SMART to be effective.

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9
Q

Financial Objectives Examples

A

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’.

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10
Q

SMART

A

Specific Measureable Agreed Realistic Time-Specific

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11
Q

Revenue Equation

A

Price x Quantity Sold

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12
Q

Revenue

A

The money that is gained by selling goods/services within a trading period.

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13
Q

Total Costs

A

Fixed Costs + (Variable Cost per Unit x No. Units)

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14
Q

Average Costs

A

Total Costs / No. Units

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15
Q

Opportunity Costs

A

The money that is forgone as a result of an alternative decision.

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16
Q

Fixed Costs Example

A

salaries
rent
insurance

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17
Q

Variable Costs Example

A

wages
raw materials
packaging

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18
Q

Profit

A

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).

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19
Q

Uses of Profit

A

Retained Profit
Dividends for Shareholders

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20
Q

Benefits of Setting Financial Objectives

A

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

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21
Q

SHAREHOLDER Needs

A

wants tor receive dividends when profits are high, as they are not a legal requirement, must have good ROI

22
Q

EMPLOYEES Needs

A

retain jobs, job security, not being made redundant, high profits mean an improvement in working conditions, potential pay rise

23
Q

FINANCIERS Needs

A

high profits made on loans paid back with interest, on time and in full

24
Q

SUPPLIERS Needs

A

paid on time and in full, high profits mean an increased demand for supplies

25
Q

CUSTOMERS Needs

A

high profits may result in lower prices or an improvement in overall design

26
Q

GOVERNMENT Needs

A

affects GDP of country, high profits means higher corporation taxes

27
Q

Cash Flow

A

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.

28
Q

What happens when a business is unable to pay its debts?

A

It becomes insolvent due to the inability to pay short-term debts.

29
Q

Window Dressing

A

The process of stalling payments to suppliers to appear more profitable and mislead stakeholders, inciting more people to invest.

30
Q

What happens when a firm sells goods on credits?

A

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.

31
Q

Cash Inflows Examples

A

when owners invest/take out loans/use overdrafts
when customers pay for goods/services
sales of fixed assets (vehicles,property,machinery)

32
Q

Cash Outflows Examples

A

when suppliers/employees are paid
overheads (rent, insurance, fuel, telephone bills) are due
when loans and overdrafts are repaid

33
Q

Net Cash Flow

A

Total Cash Inflow - Total Cash Outflow
(negative when inflow<outflow)

34
Q

Reasons for a business to appear profitable but have poor cash flow/liquidity:

A

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.

35
Q

Income Statement

A

A record of a specified trading period, records all sales revenue and all relevant costs incurred, shows the resultant profit or loss.

36
Q

Gross Profit

A

Sales Revenue - COGS (Direct Costs)

37
Q

Direct Costs

A

Costs directly associated with manufacturing and selling, the expenditure that can be clearly allocated to a particular product/area of the business.

38
Q

Direct Costs Example

A

Raw materials
Labour (wages/commissions)
Utilities for production site
Shipping

39
Q

What is gross profit used for?

A

Giving a broad indication of the performance of the business’ core activity - selling goods and/or services without taking into consideration indirect costs (overheads).

40
Q

Operating Profit (EBIT) Definition

A

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.

41
Q

Operating Profit

A

Gross Profit - Operating Expenses (direct and indirect costs)
[Sales Revenue - (Direct + Indirect Costs)]

42
Q

Profit for the Year Definition

A

Takes into account all income from all sources/full range of costs incurred including taxes on profit and interest charges.

43
Q

Profit for the Year

A

Operating Profit - Net Interest - Taxation

44
Q

How can profit be used?

A

Retained Profit used for growth/saving for future investments.
Distribution - keeping shareholders happy as a ROI.

45
Q

Revenue Objectives

A

Setting a certain amount of revenue to be achieved within a set time period.

46
Q

Examples of Revenue Objectives

A

Establishing business within market (through omnichannel distribution)
Building customer base
Help to achieve growth
Maximise short-term selling opportunities
Maximise donations (charities)

47
Q

Cost Objectives

A

Including reducing costs over time, especially compared to competitors, cost minimisation (budget businesses).

48
Q

Delayering

A

Process that involves removing layers of management to reduce costs, may result in negative publicity or brand image from redundancies.

49
Q

Profit Objectives

A

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%).

50
Q

Purpose of Profit Objectives

A

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.

51
Q

Cash Flow Objectives

A

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.

AQA A LEVEL BUSINESS STUDIES (6 decks)

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