FINANCE: objectives Flashcards
what is a strategy and what does it involve?
A long term plan of action designed to achieve a particular goal.
Strategising involves:
1. developing goals
2. planning
3. making decisions.
objectives of financial management
effeciency
liquidity
growth
solvency
profit
what is liquidity
the ability of a business to pay its short term obligations as they fall due
how does business achieve liquidity
must decide amount of liquid assets they should aim to have at a point in time
general aim is between $1.5-$3.00 of current assets to every $1 of current liabilties
business then must decide how is current assets should be split between the forms of liquidity
e.g levels of cash, accounts receivable and inventory
why do objectives for liquidity need to be set?
business must pay debts as they fall due oherwise it can be declared insolvent
what is insolvency
business is unable to pay its debs as they fall due
- does not mean they don’t have suffiecient assets to pay the bill
- means the asses could not be turned into cash quickly enough to pay bill when it is due.
impact of insolvency
can lead to company being wound up - forced to cease trading
creditors may agree to allow the business to continue and trade out of its difficulties
influences of liquidity objectives
industry in which it operates
ease with which inventory can be turned into cash
effeciency with which customer debs are collected
what is profitability
reason most businesses exist
lenders and investors provide money with expectation that business will make a profit and in return they recieve a return on their investment
how is profitabiliy determined?
by revenue and expendiure that results from the business operations
if business’s revenue s greater than expenditure, excess is known as profit
opposite = loss
what is growth
the ability of the business to increase in size in the longer term
depends on he entity’s ability to develop and use its asset structure to increase sales, profit and market share
what is effeciency
refers to the relationship between inputs and ouputs
more output = effecient
what is downsizing
reducing the size of workforce by adopting better technology so output per worker is increased
why do managers set objectives?
increased effeciency - gain competitive edge, option of lowering prices and increasing market share or increasing profits
what is solvency
ability of the business to pay both short term and long term liabilities as they fall due.
- particularly important as it is an indication of risks in investment make by owners, shareholders and creditors
- indicates whether a business will be able to repay amounts that have been borrowed for investments in capital items
