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BUSINESS - Unit 5: Decision making to improve financial performance > Financial objectives > Flashcards

Financial objectives Flashcards

1
Q

what are FINANCIAL OBJECTIVES?

A

the monetary targets a business wants to achieve within a set period of time

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2
Q

name the 6 financial objectives

A
  • return of investment
  • capital structure
  • revenue
  • costs
  • profit
  • cash flow
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3
Q

define ‘return’

A

how much money is business getting back

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4
Q

define ‘investment’

A

how much capital is being used within the business

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5
Q

what is ROI (Return of Investment)?

A

measure of a firms profitability & performance

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6
Q

what are ROI targets set as?

A

a percentage

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7
Q

who will be very interested in ROI?

A

shareholders

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8
Q

what does ROI link to?

A
  • benchmark to industry standard
  • internal benchmarking
  • external factors e.g. interest rates
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9
Q

what does ROI allow for comparisons between?

A

alternative investment opportunities

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10
Q

what is the calculation formula for ROI?

A

operating profit / capital invested (x100)

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11
Q

define capital structure

A

the relative ways in which capital has been raised i.e. retirement of equity to debt

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12
Q

what is debt?

A

anything the business OWES (borrowed from financial institutions)

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13
Q

what is equity?

A

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

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14
Q

name the 2 sources of long term funding

A

debt & equity

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15
Q

what is long term funding that is debt?

A

compulsory interest bearing

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16
Q

what does debt being compulsory interest bearing mean? what does it increase?

A

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

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17
Q

what does interest represent to the business?

A

a cost

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18
Q

why might a business set a capital structure objective?

A

to keep the proportion of long-term funding that is debt below a percentage

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19
Q

is borrowing money? elaborate

A

NO, it becomes a problem if you’re unable to pay it back

20
Q

define ‘gearing’

A

proportion of long-term funding that is a debt, relationship is referred to as gearing

21
Q

what does high percentage of long term funding debt mean? why is it thought to be this?

A

highly geared as it this increases the elect of risk

22
Q

how do you calculate percentage of long-term debt?

A

debt (long-term loans)
/
total long term funding (loans & equity)
(X100)

23
Q

define revenue objectives

A

targets set for the amount money coming into the business from sales in a set period of time

24
Q

define cost objectives

A

limits set for the amount of money to be spent on expenditure in a set period of time

25
Q

define profit objectives

A

targets set for the amount of surplus tone achieved in a set period of time

26
Q

what can revenue, cost & profit objectives be set in relation to? example

A

previous years or each other e.g. profit as a percentage of revenue

27
Q

define cost of sales

example

A

costs directly linked to the PRODUCTION of goods or services e.g. raw materials

28
Q

how do you calculate gross profit?

A

revenue - cost of sales

29
Q

define expenses

examples

A

all other costs associated with the trading of the business e.g. salaries & marketing expenditure

30
Q

how do you calculate operating profit?

A

gross profit - expenses

31
Q

define operating profit

A

takes into account all costs associated with trading activities

32
Q

how do you calculate profit for the year?

A

operating profit - interest & taxation

33
Q

when is the net effect of cash flow negative? what may business face?

A

when outflows greater than inflows - liquidity (cash flow) problems

34
Q

what short term objective is cash flow require to meet?

A

survival

35
Q

what is healthy cash flow needed to meet?

A

day-to-day expenses

36
Q

give some examples of SPECIFIC cash flow targets

A
  • to ensure all debt are received within 30 days

- to maintain a cash balance of £25,000

37
Q

name an example of a cash flow target

A

to keep a surplus in order to take advantage of unforeseen opportunities

38
Q

list the internal influences to financial objectives

A
  • financial/overall business objective
  • the characteristics of the firm
  • relationships between owners & directors
  • public or private sector?
39
Q

define ‘financial/overall business objectives’ as an internal influence

A
  • have to contribute towards achieving financial objectives

- be influenced by other functional objectives

40
Q

define ‘the characteristics of the firm’ as an internal influence

A
  • capital vs labour intensive
  • innovative
  • established
  • low cost or highly differentiated
41
Q

define ‘relationships between owners & directors’ as an internal influence

A
  • can be same or different within PLC

- what is the power of individual shareholders?

42
Q

define ‘public or private sector’ as an internal influence

A

is a key influence towards the overall objective of a business

43
Q

list the external influences to financial objectives

A
  • competitors
  • consumers
  • economic conditions
  • external environment
44
Q

define ‘competitors’ as an external influence

A
  • leader or follower
  • degree and relative power of competition
  • actions and reactions
45
Q

define ‘consumers; as an external influence

A
  • degree of loyalty

- changing tastes

46
Q

define ‘economic conditions’ as an external influence

A
  • stable or unstable
  • economic growth or decline
  • optimistic or pessimistic
47
Q

define ‘external environemnt’ as an external influence

A
  • political, social, ethical & technological change

BUSINESS - Unit 5: Decision making to improve financial performance (2 decks)

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