Section Five - Financial Decisions

Question 1

What is a financial objective?

Answer 1

A specific goal or target relating to financial performance.

Question 2

What can the financial objectives be based on?

Answer 2

-Revenue
-Costs
-Profit
-Cash flow
-Investment levels
-Capital structure
-Return on Investment
-Debt as a proportion of long term funding

Question 3

What are the benefits of setting financial objectives?

Answer 3

-Provides a focus for the business as a whole.
-Focus for decision making & effort
-Can measure success & failure
-Reduces the risk of business failure
-Improve coordination & efficiency
-Information for shareholders -> priorities of management
-Allows external stakeholders to confirm financial viability
-Provides a target to help make investment decisions

Question 4

What are the difficulties of setting financial objectives?

Answer 4

-Not always realistic
-External changes
-Difficulty in measuring
-May conflict with other objectives
-Responsibility may lie with finance department, when it is a whole business priority.

Question 5

What does it mean when a business is insolvent?

Answer 5

The business can no longer pay its debts off.

Question 6

What is return on investment(ROI)?

Answer 6

The measure of efficiency of an investment in FINANCIAL terms, used to compare the financial returns of alternative investments.

Question 7

How do you calculate the percentage ROI?

Answer 7

Return on investment(%) = Return on investment(£) /cost of investment(£) X 100

Question 8

How is the return of investment calculated (£)?

Answer 8

Return on investment= financial gain from investment - costs of investment.

Question 9

Why might companies use ROI?

Answer 9

Companies might set a target value for the ROI of an investment or use it to compare the profitability of two potential investments.

Question 10

What’s better, a higher or lower ROI?

Answer 10

The higher the ROI, the better.

Question 11

What is profit?

Answer 11

Profit= revenue-total costs

Question 12

What is cash flow?

Answer 12

The money flowing in and out of the business on a day to day basis.

Question 13

Why is cashflow within a business so important?

Answer 13

To prevent a firm from becoming insolvent.

Question 14

What is net cash flow?

Answer 14

The money left over when a business takes its outflows from its inflows.

Question 15

What is the calculation for net profit?

Answer 15

sales-variable costs-fixed costs

Question 16

What are the main cash inflows within a business?

Answer 16

-Money invested by business owners
-Loan from the bank
-Income from sales

Question 17

What are the main cash outflows within a business?

Answer 17

-Wages and training
-Raw materials
-Advertising
-Rent,mortgage, and bills
-Taxes
-Interest on loans
-Maintenance and repairs

Question 18

Define what gross profit is.

Answer 18

How efficiently a business converts raw materials into finished goods and how much value they add.

Question 19

Give the equation for gross profit.

Answer 19

Revenue - cost of sales

Question 20

Give the equation for operating profit (net profit).

Answer 20

Gross profit - expenses

Question 21

Define what profit for the year is.

Answer 21

This is the profit available to shareholders and it includes the sale of assets, interest payments, and tax.

Question 22

List some revenue objectives.

Answer 22

-Sales maximisation - volume/value
-Targeting a specific increase in sales revenue
-Exceeding the sales of a competitor
-Revenue growth (% or value)
-Market share

Question 23

List some cost objectives.

Answer 23

-Cost minimisation -this could be in terms of unit cost which are then further linked to efficiency, labour productivity, and capacity utilisation.
-Productivity- in terms of unit per worker and capacity utilisation.

Question 24

List some profit objectives.

Answer 24

-Specific level of profit (in absolute terms)
-Rate of profitability (as a % of revenue)
-Profit maximisation
-Exceed industry or market profit margins

Question 25

What’s the formula to calculate the break even point

Answer 25

Break even point = fixed cost / selling price per unit - variable cost per unit