mrs parkin -topic 5; finance mangement Flashcards
(46 cards)
what is financial objective
specific goal/ target of relating to the financial performance, resources and structure of a business
having a financial objectives provide
1) reduce the risk of business failure
2) help to coordinate the different business functions
3)measure of success of failure for the business
a focus for the entire business
4) allowing shareholders acknowledging on what’s ` happening with their shares
examples of revenue, costs and profit objective’s
revenue objectives- set to increase the value or volume of sales
costs objectives- lower costs, if costs are reduce and business still sells the same number of products at the same price it will increase overall profits BUT need to be careful on cutting down costs for instance
cutting down on quality- raise ethical questions, falling sales leading to falling profits
profit objectives - set a target figure fro profits higher from the pervious year; could do this from, increasing revenue, lower costs and by doing this, achieving costs objectives can help to achieve profits objectives
what is cash flow
all the money flowing into and out of the business over time
how is cash flow different from profit
cash flow- difference between total cash inflows and total costs over a period of time
profit- the difference between total revenue and total costs over a period
what does insolvent mean
business unable to pay its debts ( for PLC and LTD)
if a business allows customers to pay on credit how does that affect the business’s cash flow?
it could damage their cash flow, because due to the time period that the customer hasn’t paid for the product/ service because if the business wants to invest into the business they wont have enough costs to invest
what happens if the business has negative cash flow?
- leads to a problem
- if business produces too much, have to pay for supplier e.c.t. then the business is more likely to become insolvent
cash flow objectives prevent
cash flow problems
return on investment objectives help the business to become
profitable
it measures how efficient an investment is
compares the return from a project to the amount of money that has been invested
higher ROI the better, the more you can get back , higher investment
companies might set a target value fro the ROI of an investment it can be compared the profitability
formula for ROI
return on investment(£)/costs of investment x100
what does capital mean
wealth in the form of money
capital expenditure
money spent to buy fixed assets e.g. factories
why might business set investment objectives
help achieve a set amount of capital expenditure during the year or may wish to reduce capital expenditure
what does capital structure mean
to they way business raises capital to purchase an assist
what does debt capital mean
borrowed funds
what does equity capital mean
capital raised by selling shares
a business capital structure is a combination between
debt capital and equity capital
internal reasons that might influence financial objectives
1) the overall objectives of the business- financial objectives need to be consistent
2) the status of the business- new business might set ambitious target e.g. revenue and business might try and grow quickly and the business in market place
3) other areas of the business, financial objectives could be limited by that’s happening in other departments of the business
external factors that might influence financial objectives
the availability of finance- cash flow targets depends on how easy it is for the business to get credit
competitors- new competitors enter the market/ demand for competitors products increases, a business might set an objective to cut costs to be more competitive
the economy- if there is a period of economic boom- business set ambitious profit targets OR if economy isn’t doing well- business have to set more restrained target e.eg minimise costs
shareholders- want the best possible return on their investment - this puts pressure on business to set objectives to increase profits/ dividends
environmental/ ethical influences- want to please people that might be eco friendly if not could raise issues
why might businesses measure on a regular basis?
compare their profit on regular basis
compare their profit from the current from previous period to measure progress
how do you work percentage change in profit
1) current years profit - pervious years profit
2) then divide it by pervious year
3) times it by 100
different methods to increase profit
1) advertising; increasing demand, leading to increasing sales + profit BUT can be expensive no grantee it will increase sales
2) reduce their costs of production BUT reducing production costs may lead to lower quality products damage number of sales
3) improving quality- reduce costs from return increasing profits but expensive
4) reducing prices - increase demand if product is elastic or it might not cover enough costs
5) increase prices If product is price inelastic
formula for gross profit
sales - costs of sales
this type of profit is directly related to making product
