Decision making to improve financial performance - 5.1 Flashcards
What is a financial objective?
Goal or target pursued by finance department
What is the value of setting financial objectives?
Established businesses are judged for level of profits which can affect share prices or loans with banks. Also establish aspects which are causing problems as soon as possible. Also motivate employees.
What is profit?
Business makes profit if, over a period of time, revenue is greater than expenditure. Essential to earn in the long term to provide a return.
What is cash flow?
Timing of payments and receipts. Important in the short term as businesses pay creditors. For example, some businesses may give customers 30 days before they have to pay. Has to find ways to pay suppliers and employees before cash is received.
What is gross profit?
Income received from sales -cost of goods and services sold. Gives financial performance of business without taking other costs such as indirect costs or overheads into account.
What is operating profit?
Takes earnings from trading activities and costs associated with these into account.
What is profit for the year?
Takes income from all sources, trading and non-trading (R&D), costs incurred including taxes. May decide to pay owners (shareholders) or retain within to invest.
What is an income statement?
Records sales revenue over a trading period and relevant costs incurred as well as businesses’ profit or loss.
What are revenue objectives?
Objective which aims to earn a certain amount of revenue over a financial period. New businesses set objectives to help build a customer base and establish themselves.
What are cost objectives?
May set objective of reducing costs to maintain profits if operating in a market where prices are falling (supermarkets.) May also want to minimise costs to offer lower prices.
What are profit objectives?
Objectives for the entire business and can be expressed as:
- Simple figure based on profits generated over previous years and expected changes in business activity for the future.
- Percentage increase in profits which is a yearly target usually a rise from previous year.
- % compared to sales also called a profit margin.
What are cash flow objectives?
Important to ensure company has enough liquidity to meet short-term obligations, invest in opportunities and maintain smooth operation.
What are examples of cash flow objectives?
- Maintain positive cash flow so cash inflows exceed cash outflows
- Optimize cash reserves to maintain adequate level of cash to handle unexpected expenses
- Control costs to keep expenses steady and improve cash flow
What are non-current assets?
Items a business owns and which it expects to retain for a year or longer.
What is capital expenditure?
Spending undertaken by a business to purchase non-current assets such as vehicles or property. Another term for investment.
What is objectives for investment levels?
Goals a business sets regarding how much capital they want to invest and how they want the investment to perform over time.
What are examples of objectives for investment levels?
- Seeking to achieve certain level of capital expenditure to increase size, value and ability to supply products.
- Lowering capital expenditure to reduce amount borrowed if debts are too high
What is capital structure?
Ways in which business has raised the capital it requires to purchase its assets.
What are capital structure objectives?
Objectives of borrowing funds or selling shares. This will be influenced by cost of borrowing or if the company wants to keep control from shareholders.
What are internal factors on financial objectives and decisions?
- Overall objective as a financial objective must assist in achieving overall objectives
- Nature of product sold, if a business has a long cash cycle would set cash flow objectives
What are external influences on financial objectives and decisions?
- Competitive environment, retailers may consider objective of increased investment to provide new and improved locations
- Economic environment, achieving returns will assist shareholders and investors
- Political and legal environment , impact of immigration has supplied cheap labour and is great for businesses with unskilled workers
