5.1a Financial Objectives Flashcards
Financial objectives definition
Targets that the financial function of the business wishes to attain
Why do businesses set financial objectives?
- As a focus for decision making
- To give direction
- To improve efficiency
Financial objectives examples
- Revenue
- Cost
- Profit
Ways businesses can minimise costs
- Reduce wage costs per unit
- Cost reduction with raw materials
- Lowering levels of wastage
Capital definition
Assets owned by a business that will enable it to provide its product
Two capital methods
- Debt capital
2. Equity capital
Debt capital definition
Use funds that are borrowed, such as bank loans
Equity capital definition
Money provided by selling shares in the business or profit that is put back into the business
What does debt to equity ratio decide?
How much debt funding it would be happy to have in relation to equity funding
Debt to equity ratio formula
Debt to equity ratio = (Debts ÷ long term funding) x 100
What is long term funding?
Equity funding, but it also includes any loans that are repayable in over a year
Two reasons a business may invest
- To buy new capital goods
2. To replace/renew existing capital goods
Return on investment formula
ROI = ((financial gains from investment - total cost of investment) ÷ initial cost of investment) x 100
What can the results of ROI be used for?
- To compare potential investment projects
2. To compare to the interest rate the business might borrow money at to see if the ROI is greater
Advantages of ROI
- Can compare ROI of several projects
- Can use information to make decisions
