Financial Performance Flashcards
what are the values of setting finacial objectives
You Need to Know Where You’re Going:
you will know what your end goal is and what you need to do to get there.
Different Financial Goals Require Different Strategies:
Your financial goals will dictate the strategies of your business you need to use in order to achieve them. If your financial goals are quite modest, it might be enough to save a bit extra each month.
Setting Financial Goals Creates a Sense of Achievement:
by achieving you financial objectives it can create motivation for your workforce
More likely for people to invest in your business:
having a strong financial status will make people more likely to invest in your business. this strong financial status can be achieved through financial objectives
examples of financial objectives
increasing profit,
Increasing Sales,
Protecting Wealth,
Eliminating Debt,
whats the difference between cash flow and profit
What is profit?
Profit is the surplus that remains after all expenses are deducted from revenue. Of course, a business should be profitable to survive in the long term, but often initiatives to bring in profit such as new products or business investments can raise expenses, and therefore reduce profits in the short term.
whereas
Cash flow refers to the inflow and outflow of money from a business. Managing cash flow effectively is necessary for running daily operations, paying taxes, purchasing inventory, and paying employees and other costs. Unlike profit, cash flow is an indicator of how much actual cash is available to a business at any given time.
what is gross profit
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. formula: Gross profit = Revenue - Cost of Goods Sold.
what is operating profit
Derived from gross profit, operating profit reflects the residual income that remains after accounting for all the costs of doing business. In addition to COGS, this includes fixed-cost expenses such as rent and insurance,
what is profit of the year
Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business’s owners. profit of the year is the profit the business gains in a year
name some cash flow objectives
Reduce bank borrowings to a target level – perhaps by repaying amounts owed under bank loans or restricting the use of bank overdraft facilities
Minimise the time taken by customers who pay on credit to settle outstanding invoices – this is traditionally a major concern of smaller businesses and an obvious focus for a cash flow objectives
Extend the period taken to pay suppliers to maximum permitted period – e.g. paying trade creditors at the end of any agreed credit period
Building a buffer balance of cash as a precaution against unforeseen circumstances
Minimising the amounts paid out in interest charges
Reducing the seasonal swings in cash flow – perhaps by finding new uses for excess production capacity in quiet periods, or developing markets which are counter-seasonal to existing revenues
what is capital structure
The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.
influences on financial objectives
INTERNAL INFLUENCES
Business ownership
The nature of business ownership has a significant impact on financial objectives. A venture capital investor would have quite a different approach to a long-standing family ownership.
Size and status of the business
E.g. start-ups and smaller businesses tend to focus on survival, breakeven and cash flow objectives. Quoted multinational businesses are much more focused on growing shareholder value
EXTERNAL INFLUENCES
Economic conditions
As demonstrated by the Credit Crunch. The economic downturn forced many businesses to reappraise their financial objectives in favour of cost minimisation and maximising cash inflows and balances.
Significant changes in interest rates and exchange rates also have the potential to threaten the achievement of financial targets like ROCE ( return on capital employed).
Competitors
Competitive environment directly affects the achievability of financial objectives. E.g. cost minimisation may become essential if a competitor is able to grow market share because it is more efficient
how to construct a budget
Step 1: tally your income sources and how much each is
Step 2: determine fixed costs
Step 3: include Valeria expenses
Step 4: put all together
Step 5: use to predict future financial structure and analyse how each product?service is doing
benefits of a budget
Control income and expenditure (the traditional use)
Establish priorities and set targets in numerical terms
Provide direction and co-ordination, so that business
objectives can be turned into practical reality
Improve efficiency
Monitor performance
benefits of a break even chart
Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e. what output or total sales is required
Helps entrepreneur understand the level of risk involved in a start-up
Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed costs = higher break-even output)
Calculations are quick and easy – great for giving quick estimates
what are payables
debts owed by a business; liabilities.
what are receivables
amounts owed to a business, regarded as assets.
how does a businesses financial analyses help the business make financial decisions
the current financial structure of a business can be used to forecast future finances and therefore this information can be used to see if any changes need to be made to the business so that it can make enough revenue and get better cash flow so that the business survives
it can help other business make decisions on whether they want to invest into your business. If your business is at a strong financial position then a business will what to invest but without the analyses, it is harder for other business to know
the analyses can be used to see where in a business the business can cut costs. for examples, if there is a product that isn’t doing well, it can be seen on the financial analysis so the business will know not to buy anymore of this product. it makes the business more efficient.
