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Business AQA Alevel > FINANCE Setting Financial Obj > Flashcards

FINANCE Setting Financial Obj Flashcards

1
Q

What Is a financial objective

A

goal/targets that relates to a businessses financial performance

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2
Q

Financial objectives must be

A

SMART

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3
Q

Who are financial objectoves set by

A

managers responsible for the finance area in the business

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4
Q

Financial objectove smust be what , relating to teh wider of the business

A

consistent with other functional objectives

aid to the overall achievement of the business’ croporate objectives

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5
Q

What are the benefits of setting financial objectives

A
  • owners/managers can judege the performace of the business compared to when it was first established
  • new businesses susceptible to running out of cash so setting cashflow objectvoes can assist with that
  • established businesses (PLC) judged by the level of profits they make in a financial yeat , LOP impacts other aspects of the bs financial performance - share price and ability to negotiate loans with banks/financial institutions
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6
Q

Financial Objectives are also valuable to managers as a what

A

measure of performance

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7
Q

Why are financial objectives also valuable to managers as a measure of performance

A

Most businesses are judged on their financial attainments by other STKH

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8
Q

Managers will take descisions designed to

A

maximise profit

control costs

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9
Q

as businesses are judged on their financial attainmnets by STKH and maanagers make descisions designed to maximise profits/conmtrol costs it makes sense for

A

managers to set themselves objectives in these areas (e.g profit maximisation )to maximise the bs financial performance

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10
Q

What do financail objectives also enable managers to do

A

Identify aeas of the businesses performance that are causing problems at the earliest stage

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11
Q

an example of identifging areas in the business performance that are csuing problems at the arliest stage is

A

managers find out costs hjighre than predictedf

this affects the goal of lower costs

so they are able to take cdorrective action e.g getting cheaper supplies to bring costs under control

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12
Q

Finally financial objectives is motivating for who

A

employees at all levels in the bs

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13
Q

why is having financial objectives motivating for employees at all levels of the busienss

A

finanacial goal encourages employees to work conscientiously/creativley to achieve this goal which improves their perfomance and the businesses as a whole

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14
Q

When does a business make profit

A

when over a period of time revenue exceeds expenditure

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15
Q

What can a business survive without and for how long

A

a business can survive without profit for a short period of time

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16
Q

Why is it essential a business earns profits in the long run

A

to provide a return for the business owners

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17
Q

What is cash flow

A

it relates tot he timing of payments and receipts

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18
Q

Why is cashflow important in the short term

A

as a business must pay its creditors

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19
Q

What is a creditor

A

people and organisations a business owes money to

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20
Q

Just becasue a business is profitable it doesn’t mean

A

it holds large sums of cash or even has enough cash

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21
Q

Outline number 1 as to why a business is profitable but may not have large sums of cash/ enough cash

A

firms may sell g/s services at profitable prives by allowing customers to pay 60/9 days grace before paying

This means a business has to find cash to buy supplies and pay employees several months before before cash from sale of the product flows in

Cashflow can be made worse if bs has to pay suppliers promptly

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22
Q

Outline number 2 as to why a business is profitable but may not have large sums of cash/ enough cash

A

bs like a jeweller may hold latge amounts of expensive inventory for customers to view before purchasing

therefore large amounts of cash are tied up in the form of stock and unavailable for other purposes

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23
Q

Outline number 3 as to why a business is profitable but may not have large sums of cash/ enough cash

A

A business pays for assets using large sums of cash .

these assets support the bs over many years and will lead to future inflows of cash

But the outflow of cash may place pressure on a firm’s finances intially

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24
Q

What could lead to a firm becoming insolcebnt and habing to cease trading

A

a profitable business finding itself short of cash and unable to settle its bills when they’re due

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25
Q

What is a majore reason why many businesess fail

A

cash crisis

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26
Q

why in the LT must a business make profits to satisfy its owners

A

they would have invested fundsn into teh business (buying shares) and expected to see a return on this

which is only possibly in the LT if the business makes a profit

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27
Q

Round up cashflow and profit for me

A

A business may survive w/po making profits in the st if owenrs prepared to be patient

but cash has to be managed carefully in the ST to ensure bills can be paid on time

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28
Q

Why is having different ways of measuring profit a benefit

A

help managers when they’re assesing a bs financial performance and in making good decisions

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29
Q

Where are the 3 differnet types of profit recorded

A

income statement

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30
Q

What does/is the income statement do

A

record the businesses SR over a trading period
and all relevant costs incurred
as well as the businesses profit/loss

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31
Q

What is Gross Profit

A

SR - cost of sales(direct costs)

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32
Q

Define Direct Costs

A

expenditure that can be clearly allocate dto a specific product/area of the business

e.g raw materials

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33
Q

Define Indirect Costs

A

expenditure that relates to all aspects of a bs activities

e.g senior managers salaries

34
Q

What is Operating Profit

A

profit that takes into account all earnings from regular trading activities and the costs associated with these

35
Q

What is profit for the year

A

profits that takes into account a wider range of expenditures

and income including taxation

36
Q

What does gross profit indicate

A

broad indication of the financial performance of the business w/o taking into account other costs e.g indirect costs/overheads

37
Q

What 3 things does operating profit not include

A
  • income recieved/costs incurred from any activities unliklrky to be repeated in future financial years
  • profit from joint ventures/non trading activitires e.g investment
  • interest on loans / taxation on its profits
38
Q

What 3 ways might a business manager decide to use Profit for the year

A

pay some to owners /dividends for SH in case of companies

retain it within the business to invest in assets

provide a source of cash /savings

39
Q

What are the three types of objectives a business may set

A

Revenue
Cost
Profit

40
Q

Why do many new businesses set a revenue objective

A

help them build a customer base

establishing themselves in their market

41
Q

Which type of business might use a revenue objective

A

ones that aim to grow

42
Q

Why are revenue objectives used by businesses that want to grow

A

setting a challenging revenue objective can help achieve growth

43
Q

Businesses with waht type of lifecycles may use a revenue objective and why

A

bs with short product lifecycles as they want to maximises on short term selling opportunities

44
Q

Why would charities/non profit org want to use a revenue objective

A

to generate support for their chosen cause

45
Q

Revenue objectoves can relate to a x of the business rather than the x business

A

revenue obj can relate to an aspect of the business rather than the entire business

46
Q

What is a more aggressive type of revenue objective that can be set

A

one which requires a business’s revenue to grow at increasing rates over time

47
Q

PRICE ELASTICITY Revenue can be based on

and who is it appropriate for

A

a business reducing its prices as they expect a big increase in sales therefore revenue

appropriate for bs e.g supermarkets. where price elasticity is elastic

48
Q

Price inelasticity a business has customers who dont really care a bout price to to achieve higher rev objective

A

a bs increasing prices and relying on a relativley small proportion of customers to stop buying the products

49
Q

Revenue obj may not necessarily increase a business’s profits explain in regards to a challenging revenue objective

A

challenging rev objective may cause you to increase advertising costs resulting in lower profits

50
Q

Revenue obj may not necessarily increase a business’s profits explain in regards to a price elastic products

A

competitors may reduce prices too causing a loss of revenue for all bs involved but a pleasnt situation for customers

51
Q

Why might businesses set themselves an obj of reducing costs by a given percentage or amount within a stated tgime period

A

maintain their profits if its operating in a market which prices are falling

e.g aldi and lidl put pressure on morrisons asda

52
Q

If a business is unable to reduce costs it must accept

A

lower profits

53
Q

Why do some businesses pursue the objective of cost minimisation

A

managers are able to offer the lowest prices which represents good value to consumers

54
Q

What does cost minimisation entail

A

reduce to the lowest possible COP level a business incurs as a result of trading activities

55
Q

The FO of cost minimisation has gained clout due to budget airlines . What are some ways they have done cost minimisation

A

minimise labour cost - pay for you own uniform

reduce administrative costs - book via internet/ out of town or city airports to reduce landing and take off fees charges by airport authorities

56
Q

How does cost minimisation implement the managment other functional areas

A

managers of other functional areas must operate with minimal expenditure to support the fulfilment of the financial objective

57
Q

What type of coroporate objectve does cost minimisation support

A

profit maximisation

growth

58
Q

What are the two types of cost objectives

A

cost reduction

cost minimisation

59
Q

What are the objectives to do with the entire business

A

profit objectove

cost minimisation

60
Q

What are the three forms profit objectives can be expressed

A

as a simple figure

as a percentage increase in profits

as a percentage compared to sales

61
Q

Explain a profit objective as a single figure : what it’s based on / what it takes into account

A

figure based on profits made in previous years

takes into account any expected changesin the business activity over the foreseable future

62
Q

What is profit objectives as a percentage increase in profits

A

Usually a yearly target representing a certain % rise on the previous year

63
Q

What is profit objective as a percentage compared to sales

A

A profit margin

profits are x% of its revenue from sales

64
Q

What does profit objective as a percentage compared to sales allow

A

the company’s revenue to change but profits must change in line with it

65
Q

What is an advantage of a profit objective

A

simple to understand and measure

can help motivate employees across an organisation

66
Q

Why can profit objectives be risky

A

If a business suffers from an unexpected change it can record profits lower than expected/forecasted

67
Q

Why is recording lower profits than forecasted be damaging

A

it provides clear and possibly public evidence the business is underperforming

68
Q

What is the result of clear and possibly public evidence that the business is underperforming

A

fall in share prices

banks/financial institutions that have lent the business money get nervous

69
Q

What happened to wizz air when they realized profit dropped by over 13 million

A

share price fell by 5%

70
Q

What happens if a business is unable to meey to meet its financial commitmens due to not having cash

A

can’t continue trading

especially if they face long cash cycles

71
Q

What is a cash cycle

A

period of time between outflow of cash for labour and RM for a prod/ser

and

the receipt of cash from the sale of the product

72
Q

give examples of firms that face long cash cycles

A

House builders

oil companies

pharmaceutical companies

73
Q

why do oil companies have long cash cycles

A

discovering and retrieving oil and gas reserves can take years

74
Q

Why do banks require a steady inflow of cash from depositors

A

so they can have necessary funds to avail themselves of profitable lending opportunities

75
Q

What type of business may set cashflow FO

A

Those that are growing and need regular inflows of cash to finance the buying of increasing quantities of inputs

76
Q

What can happen if a business fails to set cash flow objectives

A

financial problem of OVERTRADING

77
Q

What is overtrading

A

business running out of cash due to outflows running ahead of inflows of cash

78
Q

Investment Objectives are most commonly set by businesses that

A

purchase and use big quantities of non current assets

79
Q

Investment Objectives are also called

A

capital expenditure objectives

80
Q

What is Investment

A

purchase of assets that will remain with the business over the LT ( at least 1 year )

Business AQA Alevel (23 decks)

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