Decision making to improve Financial Performance (3.5) Flashcards
Financial Objectives are the…
Are the monetary targets a business wants to achieve within a set period of time.
Financial Objectives Example (6) :
~ Return on investment.
~ Capital structure.
~ Revenue.
~ Costs.
~ Profit.
~ Cash flow.
(Financial Objectives) Return on Investment (ROI) :
- A measure of a…
- Allows for…
- How effective it is to…
A measure of a business’ profitability and performance.
~ Allows for comparison between alternative investment opportunities.
~ How effective it is to use the money tied up in the business to generate profit.
‘Return’ meaning…
‘Investment’ meaning…
‘Return’ is how much money a business gets back.
‘Investment’ is how much capital is being used within the business.
(Financial Objectives) ROI targets will be set as a % :
~ Benchmark to industry standards.
~ Internal benchmarking.
~ External environment e.g. Interest rate.
(Financial Objectives) Return on Investment Formula :
Operating profit
———————— x 100
Capital invested
Things on an Income Statement (7) :
Sales revenue, Cost of sales, Gross profit, Expenses, Operating profit, Interest and taxation, Profit for the year.
(Income Statement) Sales Revenue :
Money coming in from sales.
Quantity Sold x Selling Price.
(Income Statement) Cost of Sales :
(variable costs)
Costs directly linked to the production of the goods or services sold e.g. Raw materials.
(Income Statement) Gross Profit Formula :
Sales Revenue - Cost of Sales.
(Income Statement) Expenses :
(fixed costs)
All other costs associated with the trading of the business e.g. Salaries and Marketing Expenditure.
(Income Statement) Operating Profit Formula :
Gross Profit - Expenses.
(Income Statement) Interest and Taxation :
Interest paid on debt or received on positive balances.
- Less tax payable on profit.
(Income Statement) Profit for the Year Formula :
(end profit)
Operating Profit - Interest and Taxation.
(Financial Objectives) Cash Flow :
The movement of money into and out of a business.
- It’s important for survival.
(Financial Objectives) A business may have a specific Cash Flow Target, e,g, :
- To ensure all debts are received (paid) within 30 days.
- To maintain a cash balance of £25,000.
Capital Structure :
Refers to the relative ways in which the capital has been raised i.e. the ratio of equity to debt.
Long-term Funding :
Amount of capital that has been invested in a business and will stay in the business for over a year.
- Normally for the purchase of assets.
Long-term Funding can come from two sources :
- Equity, i.e. capital invested by shareholders of a company.
- Debt, i.e. money borrowed from financial institutions.
Gearing : The relationship, or ratio, of a…
- A business can be described as highly geared if the…
The relationship, or ratio, of a company’s debt-to-equity (D/E).
- A business can be described as highly geared if the % is thought to be high as this increases the element of risk.
Gearing Formula :
non-current liabilities (debt)
—————————- x 100
Total Long-Term Funding
(equity + non-current liabilities)
(Influences on financial objectives) INTERNAL, can control (4) :
- Corporate and other functional adjectives.
- Characteristics of the firm.
- Relationship between owners and directors.
- Public or private sectors.
(Influences on financial objectives) EXTERNAL, can’t control (4) :
- Competition.
- Economic climate/conditions (interest rates, etc).
- External environment.
- Consumers.
Budgets are…
Forecasts or plans for the future finances of a business.
- These can be for the business as a whole or set for specific functions e.g. Marketing Budget.