FINANCE Setting Financial Obj Flashcards
What Is a financial objective
goal/targets that relates to a businessses financial performance
Financial objectives must be
SMART
Who are financial objectoves set by
managers responsible for the finance area in the business
Financial objectove smust be what , relating to teh wider of the business
consistent with other functional objectives
aid to the overall achievement of the business’ croporate objectives
What are the benefits of setting financial objectives
- 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
Financial Objectives are also valuable to managers as a what
measure of performance
Why are financial objectives also valuable to managers as a measure of performance
Most businesses are judged on their financial attainments by other STKH
Managers will take descisions designed to
maximise profit
control costs
as businesses are judged on their financial attainmnets by STKH and maanagers make descisions designed to maximise profits/conmtrol costs it makes sense for
managers to set themselves objectives in these areas (e.g profit maximisation )to maximise the bs financial performance
What do financail objectives also enable managers to do
Identify aeas of the businesses performance that are causing problems at the earliest stage
an example of identifging areas in the business performance that are csuing problems at the arliest stage is
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
Finally financial objectives is motivating for who
employees at all levels in the bs
why is having financial objectives motivating for employees at all levels of the busienss
finanacial goal encourages employees to work conscientiously/creativley to achieve this goal which improves their perfomance and the businesses as a whole
When does a business make profit
when over a period of time revenue exceeds expenditure
What can a business survive without and for how long
a business can survive without profit for a short period of time
Why is it essential a business earns profits in the long run
to provide a return for the business owners
What is cash flow
it relates tot he timing of payments and receipts
Why is cashflow important in the short term
as a business must pay its creditors
What is a creditor
people and organisations a business owes money to
Just becasue a business is profitable it doesn’t mean
it holds large sums of cash or even has enough cash
Outline number 1 as to why a business is profitable but may not have large sums of cash/ enough cash
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
Outline number 2 as to why a business is profitable but may not have large sums of cash/ enough cash
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
Outline number 3 as to why a business is profitable but may not have large sums of cash/ enough cash
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
What could lead to a firm becoming insolcebnt and habing to cease trading
a profitable business finding itself short of cash and unable to settle its bills when they’re due
What is a majore reason why many businesess fail
cash crisis
why in the LT must a business make profits to satisfy its owners
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
Round up cashflow and profit for me
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
Why is having different ways of measuring profit a benefit
help managers when they’re assesing a bs financial performance and in making good decisions
Where are the 3 differnet types of profit recorded
income statement
What does/is the income statement do
record the businesses SR over a trading period
and all relevant costs incurred
as well as the businesses profit/loss
What is Gross Profit
SR - cost of sales(direct costs)
Define Direct Costs
expenditure that can be clearly allocate dto a specific product/area of the business
e.g raw materials
Define Indirect Costs
expenditure that relates to all aspects of a bs activities
e.g senior managers salaries
What is Operating Profit
profit that takes into account all earnings from regular trading activities and the costs associated with these
What is profit for the year
profits that takes into account a wider range of expenditures
and income including taxation
What does gross profit indicate
broad indication of the financial performance of the business w/o taking into account other costs e.g indirect costs/overheads
What 3 things does operating profit not include
- 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
What 3 ways might a business manager decide to use Profit for the year
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
What are the three types of objectives a business may set
Revenue
Cost
Profit
Why do many new businesses set a revenue objective
help them build a customer base
establishing themselves in their market
Which type of business might use a revenue objective
ones that aim to grow
Why are revenue objectives used by businesses that want to grow
setting a challenging revenue objective can help achieve growth
Businesses with waht type of lifecycles may use a revenue objective and why
bs with short product lifecycles as they want to maximises on short term selling opportunities
Why would charities/non profit org want to use a revenue objective
to generate support for their chosen cause
Revenue objectoves can relate to a x of the business rather than the x business
revenue obj can relate to an aspect of the business rather than the entire business
What is a more aggressive type of revenue objective that can be set
one which requires a business’s revenue to grow at increasing rates over time
PRICE ELASTICITY Revenue can be based on
and who is it appropriate for
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
Price inelasticity a business has customers who dont really care a bout price to to achieve higher rev objective
a bs increasing prices and relying on a relativley small proportion of customers to stop buying the products
Revenue obj may not necessarily increase a business’s profits explain in regards to a challenging revenue objective
challenging rev objective may cause you to increase advertising costs resulting in lower profits
Revenue obj may not necessarily increase a business’s profits explain in regards to a price elastic products
competitors may reduce prices too causing a loss of revenue for all bs involved but a pleasnt situation for customers
Why might businesses set themselves an obj of reducing costs by a given percentage or amount within a stated tgime period
maintain their profits if its operating in a market which prices are falling
e.g aldi and lidl put pressure on morrisons asda
If a business is unable to reduce costs it must accept
lower profits
Why do some businesses pursue the objective of cost minimisation
managers are able to offer the lowest prices which represents good value to consumers
What does cost minimisation entail
reduce to the lowest possible COP level a business incurs as a result of trading activities
The FO of cost minimisation has gained clout due to budget airlines . What are some ways they have done cost minimisation
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
How does cost minimisation implement the managment other functional areas
managers of other functional areas must operate with minimal expenditure to support the fulfilment of the financial objective
What type of coroporate objectve does cost minimisation support
profit maximisation
growth
What are the two types of cost objectives
cost reduction
cost minimisation
What are the objectives to do with the entire business
profit objectove
cost minimisation
What are the three forms profit objectives can be expressed
as a simple figure
as a percentage increase in profits
as a percentage compared to sales
Explain a profit objective as a single figure : what it’s based on / what it takes into account
figure based on profits made in previous years
takes into account any expected changesin the business activity over the foreseable future
What is profit objectives as a percentage increase in profits
Usually a yearly target representing a certain % rise on the previous year
What is profit objective as a percentage compared to sales
A profit margin
profits are x% of its revenue from sales
What does profit objective as a percentage compared to sales allow
the company’s revenue to change but profits must change in line with it
What is an advantage of a profit objective
simple to understand and measure
can help motivate employees across an organisation
Why can profit objectives be risky
If a business suffers from an unexpected change it can record profits lower than expected/forecasted
Why is recording lower profits than forecasted be damaging
it provides clear and possibly public evidence the business is underperforming
What is the result of clear and possibly public evidence that the business is underperforming
fall in share prices
banks/financial institutions that have lent the business money get nervous
What happened to wizz air when they realized profit dropped by over 13 million
share price fell by 5%
What happens if a business is unable to meey to meet its financial commitmens due to not having cash
can’t continue trading
especially if they face long cash cycles
What is a cash cycle
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
give examples of firms that face long cash cycles
House builders
oil companies
pharmaceutical companies
why do oil companies have long cash cycles
discovering and retrieving oil and gas reserves can take years
Why do banks require a steady inflow of cash from depositors
so they can have necessary funds to avail themselves of profitable lending opportunities
What type of business may set cashflow FO
Those that are growing and need regular inflows of cash to finance the buying of increasing quantities of inputs
What can happen if a business fails to set cash flow objectives
financial problem of OVERTRADING
What is overtrading
business running out of cash due to outflows running ahead of inflows of cash
Investment Objectives are most commonly set by businesses that
purchase and use big quantities of non current assets
Investment Objectives are also called
capital expenditure objectives
What is Investment
purchase of assets that will remain with the business over the LT ( at least 1 year )
