Financial Objectives

Question 1

What is a financial objective?

Answer 1

A specific goal or target relating to the financial performance, resources, and structure of a business.

Question 2

What are the key benefits of using financial objectives?

Answer 2

• a focus for the entire business.
• important measure of success or failure.
• reduce the risk of business failure.
• provide transparency for shareholders about their investment.
• helps coordinate the different business functions.
• key context for making investment decisions.

Question 3

What are the types of financial objectives?

Answer 3

Revenue, cost, profit, cash flow, invest investment.

Question 4

What is amortization?

Answer 4

The action or process of reducing or paying off a debt with regular payments.

Question 5

What is profit?

Answer 5

A financial gain for a business. The difference between total revenues and total costs over a period.

Question 6

What is cash flow?

Answer 6

Money coming in or out of a business over a given time period. The difference between total cash inflows and total cash outflows over a period.

Question 7

How does cash flow differ from profit?

Answer 7

• Timing differences (eg sales to customers made on credit, payment to suppliers).
• the way fixed assets are accounted for.

Question 8

What are the three measurements of profit?

Answer 8

Gross profit, operating profit, profit for the year.

Question 9

How do you calculate gross profit performance ratio?

Answer 9

Gross profit / Revenue x 100

Question 10

How do you calculate operating profit performance ratio?

Answer 10

Operating profit / revenue x 100

Question 11

How do you calculate profit for the year performance ratio?

Answer 11

Profit for the year / revenue x 100

Question 12

What are some examples of revenue objectives?

Answer 12

Revenue growth (percentage or value), sales maximization, market share.

Question 13

What is a cost minimization objective?

Answer 13

Cost minimization aims to achieve the most cost-effective way of delivering goods and services to the required level of quality.

Question 14

What are examples of profit objectives?

Answer 14

Specific level of profit, rate of profitability (as a percentage of revenues), profit maximization, exceeded industry or market profit margins.

Question 15

What are examples of cash flow objectives?

Answer 15

• reduce borrowing to target level.
• minimize interest costs.
• reduce amounts held in inventories or owed by customers.
• reduce seasonal swings in cash flow.
• net cash flow as a percentage of net profit.

Question 16

Define solvency

Answer 16

A business’s ability to meet its long-term debts and financial obligations.

Question 17

What is business investment?

Answer 17

• capital expenditure on items, such as product machinery, IT systems, buildings, etc.
• can also be the purchase of other businesses (takeovers) or brands.
• investment is intended to help generate a return (profit) over more than a year.

Question 18

What are two common investment objectives?

Answer 18

• level of capital expenditure (set at either an absolute amount or as a % of revenues).
• return on investment (usually set as a target % return).

Question 19

How do you calculate return on investment?

Answer 19

• return on investment / initial cost of investment x 100

• return on investment = financial gain from the investment - cost of investment (not inc. initial cost)