Setting financial objectives Flashcards
(30 cards)
What is a financial objective?
A financial objective is a goal or target pursued by the finance department (or function) within an organisation
What is profit?
Revenue > Expenditure
A business can survive without making a profit for a short period of time, but it is essential in the long run
What is cash flow?
Timing of payments and receipts
Important in short term, businesses must pay creditors.
What is an income statement?
Income statements record a business’s sales revenue over a trading period and all relevant costs incurred as well as the business’s profit or loss
What is gross profit?
Gross profit is income received from sales minus the costs of goods and services sold
What are direct costs?
Direct costs are expenditure that can clearly be allocated to a particular product or area of the business. Examples include raw materials and components
What are indirect costs?
Indirect costs are expenditure that relates to all aspects of a business’s activities, such as maintenance costs for buildings or senior managers’ salaries
What is operating profit?
Operating profit is the financial surplus arising from a business’s normal trading activities and before taxation
What is profit for the year?
Profit for the year is a measure of a business’s profits that takes into account a wider range of expenditures and incomes including taxation
What are objectives?
Objectives are medium to long-term goals established to coordinate the business
What are revenues?
Revenues are the earnings or income generated by a firm as a result of its trading activities
What financial objectives are there?
Revenue Objectives
- aim to grow
- demand sensitive to price
Cost Objectives
- cost minimisation
- fixed or variable
Profit Objectives
- simple figure
- percentage increase
- percentage compared to sales
Cash flow objectives
Investment objectives
Capital structure objectives
What is investment?
Investment is the purchase of assets such as property, vehicles and machinery that will be used for a considerable time by the business
What are non-current assets?
Non-current assets are items that a business owns and which it expects to retain for one year or longer. Examples include property and vehicles
What is capital expenditure?
Capital expenditure is spending undertaken by businesses to purchase non-current assets such as vehicles and property. It is another term for investment.
What factors can make it easier for businesses to raise capital for investment?
- If business has not already borrowed excessive amounts
- Purchasing non-current assets that will retain value and could be resold
- Business is a company and can sell additional shares to raise funds
What is capital structure?
Capital structure refers to the way in which a business has raised the capital it requires to purchase its assets
What are the internal factors that have an influence on financial objectives and decisions?
Overall objectives of the business
- must assist business in achieving its corporate (overall) objectives
- profit maximisation = cost minimisation
Nature of the product that is sold
- cash flow?
Objectives of the business’s senior managers
- shareholders = increase share price
What are the external factors that have an influence on financial objectives and decisions?
The competitive environment
- investment
The economic environment
- profits & cash flow
The technological environment
- profit & investment
The political and legal environment
- cost minimisation
What is variance analysis?
Variance analysis is the process of investigating any differences between forecast data and actual figures
What is a favourable variance?
A favourable variance exists when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget.
Causes:
- wage rises lower than expected
- economic boom leads to higher sales
- rising value of pound makes imports cheaper
What is an adverse variance?
An adverse variance occurs when the difference between the figures in the budget and the actual figures will lead to the firm’s profits being lower than planned.
Causes:
- competitors introduce new products
- government increases business rates
- fuel prices increase as price of oil rises
Why may managers use break-even analysis?
- To help decide whether the business idea will be profitable and whether it is viable
- Help decide the level of output and sales necessary to generate a profit
- Results of break-even analysis can be used to support loan application
- Assess impact of changes in the level of production
- Assess the impacts of different prices and levels of costs
What is contribution?
Contribution is the difference between revenue and variable costs
