Objectives of Financial Management Flashcards

1
Q

What does a ‘strategic plan’ refer to?

A

A long-term plan (5-10 yrs) for a business that outlines its future direction

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2
Q

What are the objectives of financial management?

A

Profitability

Growth

Efficiency

Liquidity

Solvency

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3
Q

Define profitability

A

The earnings of the business after expenses have been paid

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4
Q

How is profitability measured?

A

Net Profit

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5
Q

Where can profitability be found on financial statements?

A

Gross Profit (Income Statement)

Net Profit (Income Statement)

Earnings Before Interest & Tax (Income Statement)

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6
Q

What is gross profit?

A

Sales revenue minus cost of goods sold (wholesale costs and transport costs)

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7
Q

What is net profit?

A

The final amount of revenue remaining after all expenses have been paid?

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8
Q

Why is EBIT (earnings before interest & tax) a more precise measure of profitability than net profit?

A

Because it measures the profit made directly from the operations of the business

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9
Q

Why is profitability desireable?

A

Because it is the function of a business - to make a return for the investment of its owner

(And because capitalism, duh)

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10
Q

Define growth

A

The size of the business compared to competitors in the same market

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11
Q

Why is growth desireable?

A

A business that grows will increase its size and therefore its profitability in the long-term

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12
Q

How can growth be achieved?

A

Increasing the physical size of the business

Increasing market share through business expansion

Increasing the value of the assets in the business

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13
Q

Define efficiency

A

The achievement of maximum output with the minimum level of inputs

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14
Q

Why is efficiency desireable?

A

When a business decreases its costs, it increases its profit

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15
Q

How can efficiency be measured?

A

An expense ratio (total expenses/total sales)

The business’s ability to collect its accounts receivables (accounts receivables turnover ratio)

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16
Q

Define liquidity

A

A measure of how quickly a current asset can be converted into cash

17
Q

What are current assets?

A

Assets expected to be used, sold or converted into cash within 12 months

They include cash at the bank, accounts receivable and stock

18
Q

Why is liquidity important?

A

It determines the ability of a business to pay short term debts (current liabilities) as they fall due

19
Q

What are current liabilities?

A

Debts that are due to be repaid within 12 months

20
Q

What is the danger of a business with low liquidity?

A

If it cannot pay its short term debts, as business may:

  • Have its facilities disconnected
  • Find suppliers do not wish to trade with it
  • Its credit rating will fall
21
Q

What is the danger to a business of having too high liquidity?

A

If a financial manager decides to keep a lot of cash in the business bank account, they will be wasting financial resources and losing potential profits

22
Q

Define solvency

A

The ability of a business to pay both short and long term liabilities as they fall due

23
Q

Why is solvency important?

A

It is a measure of whether a business is financially stable

24
Q

What does gearing refer to?

A

How much debt finance the business has acquired to fund its operations compared to its use of equity finance

25
What makes up the triple bottom line for businesses?
Financial Achievements (Profit & Growth) Social Concerns Effect on the natural environment