Financial objectives Flashcards
what are FINANCIAL OBJECTIVES?
the monetary targets a business wants to achieve within a set period of time
name the 6 financial objectives
- return of investment
- capital structure
- revenue
- costs
- profit
- cash flow
define ‘return’
how much money is business getting back
define ‘investment’
how much capital is being used within the business
what is ROI (Return of Investment)?
measure of a firms profitability & performance
what are ROI targets set as?
a percentage
who will be very interested in ROI?
shareholders
what does ROI link to?
- benchmark to industry standard
- internal benchmarking
- external factors e.g. interest rates
what does ROI allow for comparisons between?
alternative investment opportunities
what is the calculation formula for ROI?
operating profit / capital invested (x100)
define capital structure
the relative ways in which capital has been raised i.e. retirement of equity to debt
what is debt?
anything the business OWES (borrowed from financial institutions)
what is equity?
any money the business owns i.e. capital that has been invested in business by shareholders, and will stay in it for OVER A YEAR - is normally for the purchase of assets
name the 2 sources of long term funding
debt & equity
what is long term funding that is debt?
compulsory interest bearing
what does debt being compulsory interest bearing mean? what does it increase?
that regardless of profits interest + repayments must be made to financial institutions, increases the degree of risk undertaken by the business especially if interest rates start to rise
what does interest represent to the business?
a cost
why might a business set a capital structure objective?
to keep the proportion of long-term funding that is debt below a percentage
is borrowing money? elaborate
NO, it becomes a problem if you’re unable to pay it back
define ‘gearing’
proportion of long-term funding that is a debt, relationship is referred to as gearing
what does high percentage of long term funding debt mean? why is it thought to be this?
highly geared as it this increases the elect of risk
how do you calculate percentage of long-term debt?
debt (long-term loans)
/
total long term funding (loans & equity)
(X100)
define revenue objectives
targets set for the amount money coming into the business from sales in a set period of time
define cost objectives
limits set for the amount of money to be spent on expenditure in a set period of time
define profit objectives
targets set for the amount of surplus tone achieved in a set period of time
what can revenue, cost & profit objectives be set in relation to? example
previous years or each other e.g. profit as a percentage of revenue
define cost of sales
example
costs directly linked to the PRODUCTION of goods or services e.g. raw materials
how do you calculate gross profit?
revenue - cost of sales
define expenses
examples
all other costs associated with the trading of the business e.g. salaries & marketing expenditure
how do you calculate operating profit?
gross profit - expenses
define operating profit
takes into account all costs associated with trading activities
how do you calculate profit for the year?
operating profit - interest & taxation
when is the net effect of cash flow negative? what may business face?
when outflows greater than inflows - liquidity (cash flow) problems
what short term objective is cash flow require to meet?
survival
what is healthy cash flow needed to meet?
day-to-day expenses
give some examples of SPECIFIC cash flow targets
- to ensure all debt are received within 30 days
- to maintain a cash balance of £25,000
name an example of a cash flow target
to keep a surplus in order to take advantage of unforeseen opportunities
list the internal influences to financial objectives
- financial/overall business objective
- the characteristics of the firm
- relationships between owners & directors
- public or private sector?
define ‘financial/overall business objectives’ as an internal influence
- have to contribute towards achieving financial objectives
- be influenced by other functional objectives
define ‘the characteristics of the firm’ as an internal influence
- capital vs labour intensive
- innovative
- established
- low cost or highly differentiated
define ‘relationships between owners & directors’ as an internal influence
- can be same or different within PLC
- what is the power of individual shareholders?
define ‘public or private sector’ as an internal influence
is a key influence towards the overall objective of a business
list the external influences to financial objectives
- competitors
- consumers
- economic conditions
- external environment
define ‘competitors’ as an external influence
- leader or follower
- degree and relative power of competition
- actions and reactions
define ‘consumers; as an external influence
- degree of loyalty
- changing tastes
define ‘economic conditions’ as an external influence
- stable or unstable
- economic growth or decline
- optimistic or pessimistic
define ‘external environemnt’ as an external influence
- political, social, ethical & technological change
