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Business > Section 3.5 - Financial Performance > Flashcards

Section 3.5 - Financial Performance Flashcards

1
Q

Financial Objectives

A

Definition: what a business wants to achieve financially; specific targets in mind and a specific period of time they want to achieve them in

> set by financial managers; must be consistent with financial objectives set by other departments
can improve coordination between team; acts as a focus of decision-making, allow for investors to see if its a worthwhile investment
look at financial data to assess financial position; objectives help with where they need to improve

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2
Q

Revenue objectives

A

Set to increase value of volume of sales

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3
Q

Cost objectives

A

Usually set to minimise costs
^^^
This will increase their overall profit but have to be careful that it doesn’t reduce quality pr services and doesn’t raise ethical questions

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4
Q

Profit objectives

A

Set a target figure for profit or a % increase from the precious year

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5
Q

Cash flow objectives

A

Definition: all the money flowing into and out of the business over a period of time, and calculated at the least time is leaves or enters

  • most important thing to a business in the short term
  • long term: making a profit is the main objectives
  • business allows payments on credit = may damage their cash flow
  • overtrading: if a business pays too much, they have to pay suppliers and staff a lot so they become insolvent before they have a chance to get paid by customers

Objectives are put in place to help prevent cash flow problems.
May set objectives to spread revenue or costs more evenly throughout the year, acquire a specific amount of liquid assets or a target a minimum cash balance.

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6
Q

Return on Investment Objectives

A

Definition: measure how efficient an investment is - compares the return from a project to the amount of money invested
^^^ the higher the ROI the better

Calculation:
Return of Investment (%) = return on investment (£) / cost of investment (£) x 100

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7
Q

Lon-term investment and funding

A

Capital - wealth in the form of money and other assets owned by a business
Capital expenditure - money spent to buy fixed assets
^^^ business may set investment bjectives to help achieve a set amount of capital x a year; alternatively May wish to reduce capital expenditure
Capital structure: the way a business raises capital to purchase assets
^^^ combination of debt capital and equity capital (raised by selling shares, the same as share capital)

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7
Q

Lon-term investment and funding

A

Capital - wealth in the form of money and other assets owned by a business
Capital expenditure - money spent to buy fixed assets
^^^ business may set investment bjectives to help achieve a set amount of capital x a year; alternatively May wish to reduce capital expenditure
Capital structure: the way a business raises capital to purchase assets
^^^ combination of debt capital and equity capital (raised by selling shares, the same as share capital)

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7
Q

Long-term investment and funding

A

Capital - wealth in the form of money and other assets owned by a business
Capital expenditure - money spent to buy fixed assets
^^^ business may set investment objectives to help achieve a set amount of capital x a year; alternatively May wish to reduce capital expenditure
Capital structure: the way a business raises capital to purchase assets
^^^ combination of debt capital and equity capital (raised by selling shares, the same as share capital)

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8
Q

Internal factors influencing financial objectives

A
  • overall objectives of the business; needs to be consistent with the corporate objectives
  • status of the business
  • other areas of the business; other departments may limit financial objectives
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9
Q

External factors influencing financial objectives

A
  • availability of finance
  • competitors
  • economy
  • shareholders
  • environmental/ethical influences
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10
Q

Measuring and increasing profit

A
  • measure profits on a regular basis; compare profits from current period to precious periods to measure progress
  • business work out % increase or decrease in their profits from year to year
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11
Q

Percentage change in profit - Calculations

A

Percentage change in profit = current years profit/ previous years profit x 100

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12
Q

Methods used to increase profit

A
  • increase prices (if demands is inelastic)
  • reduce prices to increase demand (if demand is price elastic)
  • try to reduce costs of production; may lead to lower quality
  • may use advertising to increase demand; can be expensive and no guarantee
  • improving quality of product; could lead to an increase in profits
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13
Q

Reporting profit - gross profit

A

Definition:
Amount left over when the cost of sales is subtracted from sales revenue

Calculation:
Gross profit = sales revenue - cost of sales

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14
Q

Reporting profit - operating profit

A

definition:
All revenues and costs from regular trading, none from one-off events and consider both cost of sales and operating expenses

Calculation:
Operating profit = sales revenue - cost of sales - operating expenses

15
Q

Reporting profit - profit for the year

A

Definition:
Takes into account profit or loss from one-off events and financial costs

Calculation:
Profit for the year = (operating profit + other profit) - net finance costs - tax

16
Q

Profit margins

A

^^^ show how profitable a business or product is
Profitability - the amount of profit relative to revenue or investment
Profit margins - measure the relationship between the profit made and the sales revenue > tell you what percentage of a selling price is actually profit
^^^ can be uses to make comparisons over as periods of time or compare profitability of different companies

17
Q

Profit margin - gross profit margin

A

Gross profit margin (%) = gross profit / sales revenue x 100

(Gross profit = sales revenue - cost of sales)

18
Q

Profit margin - operating profit margin

A

Operating profit margin (%) = operating profit / sales revenue x 100

19
Q

Profit margin - profit of the year margin

A

Profit of the year margin (%) = profit of the year / sales revenue x 100

20
Q

Cash flow

A

Cash flow cycles - the gap between money going out and coming in
^^^
- important to make sure there is always enough money to make payments
- for new businesses, cash flow cycles can be a big problem; need money for start up costs

Length of the cash flow cycle depends on:
- type of product; how long it takes to produce and how long its held in stock
- credit payments

  • creditors - people who are owed money by a business
  • payables - money that the business owes
  • debtors - people who owe the business money
  • receivable - money that is owed to a business
21
Q

Methods to improve cash flow cycles

A
  • arranging over drafts with banks
  • try and hold less stock; less cash is tied up in stock
  • try to reduce the rimes between aging supplier and money to customer
  • credit controllers keep debtors in control
  • debt factoring gives instant cash to businesses who’s e customers haven’t paid their invoices; banks and other financial institutions act as debt factoring agents
  • sale and leaseback; when businesses sell equipment to raise capital and then lease the equipment back
22
Q

Cash flow forecast

A

Definition:
Show the amount of money that managers expect to flow in and out of the business over a period of time in the future

Advantages:
> can use them to make sure they have enough cash to pay suppliers
> can show them to banks and venture capitalists when trying to get loans
> can be used to check the firm isn’t holding too much cash
> established firms based forecasts on the past experience

Negatives:
> CFF can be base don false assumption
> circumstances can change suddenly
> needs a lot of experiencing for a good cash flow forecasts and lots of research
> false forecasts can have disastrous results

23
Q

Setting budgets

A

Income budgets:
Forecast the amount of money that will come into the company as revenue
> needs to predict how much it will sell and at which price
> managers estimate this using their sales figures as well as market research

Expenditure budgets:

24
Q

Break-even analysis

A

Break-even output:
The level of sales a business needs to cover its costs
Calculation:
Break-even point - costs = revenue

  • business makes a loss if sales are below break-even output and costs are more than revenue
  • business makes a profit if sales are above break even output and revenue exceeds costs

New businesses - should always do a break-even analysis to find the break-even output
Established businesses - when preparing to launch new products use break even analysis to work out how much profit they are likely to make, and to predict the impact of new activity on cash flow

25
Q

Break even analysis - contribution

A

Definition:-
The difference between selling price of a product and the variable costs it takes to produce it

Calculation:
Total contribution = total revenue - variable costs
OR
Total contribution = contribution per unit x number of units sold

> contribution is used to pay fixed costs and The amount of left over is profit
break even output = fixed costs
Calculation:
Break-even output = fixed costs / contribution per unit

26
Q

Break even analysis - break-even chart

A

Definition:
Show costs ad revenue plotted against output and they use them to see how costs and revenue vary with different levels of output
> output on the horizontal axis
> costs and revenue on the vertical axis
> plot fixed costs and add variable costs to fixed costs to get the total costs, plot them on the graph
> plot revenue
^^^ the break-even output is where the revenue line crossed the total costs

27
Q

Break even analysis - Margin of Safety

A

Definition:
The amount between the actual output and break even

Calculation:
Margin of safety = actual output - break-even output

28
Q

Break even analysis - advantages

A
  • easy to do
  • quick
  • they let the businesses forecast how variations in sales will affect costs, revenue, and profit, and how variations in price and costs will affect how much they end to sell
  • can use them to help persuade the bank to gage them a loan
  • influence decisions whether new products are launched or not
29
Q

Break even analysis - disadvantages

A
  • assumes that variable costs will rise steadily; not always the case
  • simple for a single product
  • if the data is wrong, the results will be wrong
  • assumes the business sells all the products without any wastage, e.g. not the case for restaurants
  • only tells you how many units you need to sell to break even, doesn’t say how many you’re actually going to sell

Business (11 decks)

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