Financial Objectives 3.5

Question 1

Financial Objective Definition

Answer 1

Specific goal or target of relating to the financial performance, resources and structure of a business

Question 2

Benefit of financial objectives

Answer 2

-Measures success or failure for the business
-Reduces risk of business failure
-Provides transparency for shareholders about their investments
-Helps with making investment decisions
-Motivates employees
-Keeps income levels consistent

Question 3

Different types of financial objectives:

Answer 3

-Profit objectives
-Cash flow objectives
Revenue objectives
-Investment objectives
-Cost minimisation objectives

Question 4

Profit Objective Definition

Answer 4

financial goals set by a business to achieve a specific level of profit
It is important in order to maximise profits through reducing costs, financial sustainability , decision making such as expansion providing measurable target that can inform strategic choices and tactics, measuring success ensuring the business stays on track

Question 5

Profit Definition

Answer 5

financial gain a business makes after subtracting all its costs and expenses from its total revenue

Question 6

Three types of Profit with Definition

Answer 6

1) GROSS PROFIT - Difference between revenue and cost of sales, it shows how much profit is made from goods and services without deducting all the costs , it helps a business to identify which items are the most profitable

2) OPERATIBG PROFIT - Difference of gross profit with all expenses connected to the product, Records how much profit has been made in total from the trading activities of the business

3) PROFIT FOR THE YEAR - Difference of operating profit with tax and loans, The amount of profit that is left after the tax has been accounted for, shareholders then decide how much of this is paid out to them in dividends and how much is left in the business as retained profit

Question 7

Cash Flow Objectives

Answer 7

Goal set by a business to ensure it has sufficient cash available to meet its day-to-day operations, covering short term liabilities and avoiding financial difficulties,
It prevents insolvency that occurs if a business doesn’t manage its cash flow well, improves financial planning allowing a business to predict periods of surpluses or shortages, enhances investor confidence

Question 8

Cash Flow Definition

Answer 8

Outflows over a period of time movement of money into and out of a business over a period of time tracking the inflows a business receives and outflows the business spends

Question 9

Revenue Definition

Answer 9

Total amount of money a business earns from its sales of goods or services before any costs or expenses are subtracted

Revenue = price per unit x quantity per units sold

Question 10

Revenue Objective Objectives

Answer 10

specific financial goal set by a business to achieve a certain level of income or sales over a given period of time

It aims to maximise revenue, increasing sales and income by expanding market share, increasing prices also helps measures business performance

-Revenue growth - aiming to grow total revenues by 10% and reach £1 million in sales during the year
-Sales maximization in order to secure economies of scale
-Market share - Growth share to 20%

Question 11

Investment Definition

Answer 11

Act of allocating money or resources to an asset or venture with the expectation of generating a return of profit over time
There is capital investment which is spending money on long-term assets like technology and machinery
Financial investment is investing in financial asset such as stocks bonds

Question 12

Investment Objective Definition

Answer 12

Financial goals a business aims to achieve through investment activities

Question 13

Return On Investment (ROI) Definition

Answer 13

Financial metric used to measure the profitability of effectiveness of an investment

Business investment includes capital expenditure on machinery, IT systems, purchasing other businesses or brands

ROI = (current value of investment - initial value of investment) / initial value of investment X 100

ROI = net profit/ cost of investment x 100

Question 14

PRO and CON of ROI

Answer 14

PRO:
Business can quickly asses whether the money invested is generating a good return , Helps makes informed decisions on the reallocation of products, Good for comparing investment opportunities

CON:
Doesn’t account for the time factor of an investment it only measures return without how long it took to return which can be misleading as two investments with the same ROI might differ in time
Also ROI may overlook volatility in long term sustainability

Question 15

Cost Minimisation Definition

Answer 15

Business strategy aimed at reducing the costs of production and operations to the lowest possible level without compromising the quality of goods or services

Question 16

Cost minimization Objective

Answer 16

Goals set by a business to reduce its production or operational costs while maintaining quality of products or services

Question 17

Budget Definition

Answer 17

Estimate of income, which is the amount of money that comes into a company as revenue, and expenditure, which is the total costs, for a set period of time

Question 18

Favourable Variance

Answer 18

Occurs when a business’s actual performance exceeds expectations of the budgeted figures

E.G If a company budgeted for £100,000 in revenue but actually earned £120,000, it would have a favourable variance of £20,000

Analysing the data, a business can then set more ambitious targets or improve production to meet surges in demand

Question 19

Adverse Variance

Answer 19

Occurs when a business’s actual performance falls short of expected budgeted figures

E.G If a company budgeted for £100,000 in revenue but only earned £80,000, it would have an adverse variance of £20,000

Analysing the data, a business can decide to cut prices to try increase sales or introducing new promotional strategies o encourage customers to purchase the goods and services

Question 20

Importance of Budgeting

Answer 20

Help achieve targets by keeping costs low and revenue high, Helps a business focus on priorities, Coordinate spending
-Planning
-Forecasting
-Communication
-Motivation

Question 21

Cash Flow forecasting Definition

Answer 21

Process of estimating inflows and outflows of cash over a specific period of time helping a business manage its liquidity

Question 22

Closing Balance Definition

Opening Balance Definition

Answer 22

Opening balance is the amount of cash a business has at the beginning of a specific period of time

Closing balance is the amount of cash a business has at the end of a specific period

Question 23

Why is Cash flow forecasting important for a business

Answer 23

Ensures liquidity - A business can avoid running out of cash which could lead to insolvency. - Paying suppliers, employees and bills are organised to set dates depending on the business’s finances

Identifies Potential shortfalls - Allows a business to anticipate periods where cash inflow may be low or expenses exceed the cash availability - Allows a business to secure loans or adjust payment terms with suppliers in advance

Builds confidence with stakeholders - Reliable cash flow will give stakeholders confidence in the business’s financial management

Question 24

How to improve cash flows by speeding up inflows (receivables)

Answer 24

Increase sales of volume - by targeting new customers, expanding into new markets or launching new products, a business can increase receivables by attracting more consumers to purchase the goods or services the business is selling

Offering credit payments - Increase in sales as customers may be more inclined to purchasing a good if they can pay for it on a later date when most convenient to them. However risk of delayed payments

Upsell and cross-sell - offer additional products or services and suggest complementary items during the process. This increases total revenue of each sale thus increasing receivables a business owns

Question 25

How to improve cash flows by slowing down outflows (payables)

Answer 25

Maintaining strong supplier relationships - Allows for leniency in extending payment dates Could strain relationship with suppliers if overused as it makes your business seem unreliable Optimize Inventory management - Reducing extra inventory can minimise frequent large purchases which reduces payables by cutting down on how often you need to place orders with suppliers - Implementing JIT can reduce need to order inventory in large quantities which reduces payables and increases cash availability Negotiate extended payments - Allows for more time to generate cash from sales before needing to make payments If bulk ordering, you could negotiate for longer payment terms

Question 26

Problems improving cash flow forecasting

Answer 26

Based on estimates and doesn’t take into account external factors e.g a recession and government policies

Question 27

Break-even definition

Answer 27

Point within a business where the the company’s total revenue is equal to total costs, meaning the business is neither making profit or a loss Break even = Fixed cost /Selling price - variable cost (also known as contribution)

Question 28

Importance of Break-even analysis for a business

Answer 28

Determines minimum sales requirement by evaluation amount of revenue needed to be produced to cover any costs and prevent losses Informs financial Planning - Provides valuable insight into the financial health of a business allowing managers to plan for future sales, expenses and potential profitability while also making informed decisions about budgeting and investment - If break even is too high the business will have to reconsider the feasibility of its plans Helps with cost control - Highlights areas where costs can be reduced through analysing fixed and variable costs, helping a business operate more efficiently

Question 29

Pro and Con of Break even analysis for a business

Answer 29

PRO: Provides visual clarity of costs, revenue, and the break-even point, making it easy for businesses to understand when they will start making profit CON: Assumes constant costs and prices remain constant which may not reflect real-world changes like discounts or variable expenses

Question 30

Margin of safety definition

Answer 30

Difference between a company’s actual sales and its break even sales Margin of safety = Actual sales - Break even sales

Question 31

Contribution Definition

Answer 31

Amount of money a business makes per unit of product sold contribution = Selling price per unit - variable cost per unit

Question 32

External Finance Definition

Answer 32

Funds a business obtains from sources outside the organization, the investments can be gained from banks, investors and lenders outside of the business PRO and CON of external finances

Question 33

Internal Finance Definition

Answer 33

Funds that a business generates from its own operations relying on existing resources and earnings

Question 34

Debt Factoring Definition

Answer 34

Where a business sells its outstanding accounts receivable to a third party, known as a factor, at a discount. The factor then takes responsibility of collecting debt from the business’ customers Pro - Improves cash flow, faster access to funds, outsourcing credit control which reduces responsibilities Con - loss of control over customer relationships, costly fees of invoice value , impact on profit margins - a business might receive less money than it would if it collected payments directly Short term and long term use of debt factoring - Addresses immediate financial needs however does not address root causes of cash flow problems

Question 35

Overdraft Definition

Answer 35

Financial arrangement in which a bank allows a business or individual to withdraw more money from their bank account than the available balance, up to a specified limit Pro - quick access to funds in case of short term cash flow issues, convenient short term financing as it is a relatively low cost option for covering immediate expenses Con - high interest rates and fees, short term solution , potential for debt cycle - cycle of accumulating interest making it harder to repay the amount owed

Question 36

Crowdfunding Definition

Answer 36

Process of raising money for a business by collecting small contributions from a large number of people Pro - access to capital which can be difficult to access otherwise, lower risks for entrepreneurs as the financial burden is spread out Con - time consuming , uncertain outcomes so if a business fails to meet their financial goal they would have wasted funds and resources, fees and costs charged from crowdfunding platforms, intellectual property risk

Question 37

Loans Definition

Answer 37

Sum of money borrowed from financial institutions such as banks, with an agreement that will be repaid usually with interest over a period of time Pro - immediate access to capital, flexible repayment terms Con - additional fees and interest, debt burden as taking on a loan acts as a financial obligation that can strain cash flow, qualification requirement such as good credit history or collateral

Question 38

Retained Profit Definition

Answer 38

Portion of a company’s profit that is reinvested within the business Pro - no interest, reinvestment for growth such as for expansion, research and development or improving operations Con - reduced dividend payments, opportunity cost, over retention not being used efficiently

Question 39

Share Capital Definition

Answer 39

Amount of money a company raises by issuing shares to shares to shareholders in exchange for equity ownership Pro - no repayment obligations, access to large funds, financial risks shared amongst shareholders rather than one person Con - dilution of ownership as the company is divided among more people (shareholders), conflicting interests between shareholders and management's strategic vision for the company - different priorities

Question 40

Venture Capital Definition

Answer 40

Form of financing where investors provide capital to early stage businesses that have high growth potential Pro -reduce financial pressure, access to greater funding, business gains expertise and guidance as venture capital provides mentoring, networking contacts Con - pressure for high returns, risk of loss of control, dilution of ownership

Question 41

Real World Examples

Answer 41

KFC financial goal of increasing revenue through global expansion entering international markets KFC has improved it’s profitability by diversifying it’s menu to cater a wider range of consumers to satisfy them E.G. in India there is a high percentage of vegetarians. Using this information, KFC introduced various vegetarian options to reach a wider range of consumers and achieve their profit objective Tesla original financial objective was to was to grow it’s revenue by increasing car sales however, now it’s financial objective focus is to move from unprofitability to sustainable profitability Working towards more sustainable profit margins while ensuring long-term growth and return on investment Tesla revisited it’s old financial objectives and adjusted them due to external factors such as market conditions, competition and technological advancements

Question 42

REMEMBER TO CHECK

Answer 42

Calculation for Budget Calculation for Budget Expenditure Net Cash flow, opening balance and closing balance calculations Drawing Break-even graphs and calculations