Unit 5 Flashcards
Benefits of setting financial objectives
The shareholder can decide whether to invest in ur business or not
Co-ordination as allows employees to be motivated and
Allow success or failure to be measured
Disadvantages of setting financial objectives
Some objectives can be hard to measure
Can be difficult to set realistic objectives
The return of investment equation
Return of investment/cost of investment ×100
What is return of investment
Measure of the efficiency of am investment in financial terms
advantages of ROI
Can reveal trends in financial performances and can see the total level of investment that it should undertake
Formula for debt
Debt/long term funding ×100
How is profit calculated
Revenue-expenditure
Gross profit calculation and what is it
Revenue minus cost of sales and it is raw materials and wages
Operating profit calculation and what is it
Gross profit minus administrative expenses and is profit made from trading
What is profit of the year how is it a useful measure
All profit of the year including non trading revenue like sale of assets and expenditure but is a measure for shareholders as shows how much they benefit their ownership of the business
Revenue objective
Sales maximisation
Exceeding sales of competitor
Targeting specific increase in sales revenue
Cost objective
Cost minimisation
Lowering levels of wastage
Find cheaper suppliers
Relocating to a cheaper site
Profit objectives
Profit maximisation
Targeting a specific level of profit
Exceeding the profit of competitors
Cash flow objectives
Maintaining a minimum closing monthly cash balance
Reducing bank overdraft
Spread costs more evenly
External factors of objectives
Social: adjust to society e.g access to business 24/7 meaning difficult for business to set targets of lower costs but can generate more income
Environmental: higher demand of environmental products change supplier
Suppliers: depending on supplier could ruin targets
Internal influences on financial objectives
Human resources: good recruitment plus training policy can increase profitability
Nature of the product: businesses are heavily influenced by products and services
Budget holders
Responsible for Exceeding targets of income and profit budgets
1-4 stages of budgets
-set objectives
-Carry out market research
-Carry market research in costs
-complete income budget
Stages 5-8 of budgets
-Construct expenditure budget
- create an overall profit budget
-draw a divisional/departmental budget
-summarise budgets into a master budget
What is the expenditure budget based on
Level of sales
Variance analysis definition
Difference between the budget and actual figure
Reasons for setting budgets
Gain financial support
Ensure a business does not overspend
Assign responsibility
Problems of setting budgets
Problems of gathering info
Managers may not know enough about the department
Features of good budgeting
Consistent with the aims of the business
Challenging but realistic targets
Cash flow problems
Credit payments
Length of time required to convert inputs into outputs
Amount of cash held at beginning of cash flow cycle
Contribution per unit calculation
Sales-variable costs
Total contribution
Contribution per unit × numbers of unit sold
Break even out put equation
Fixed costs divided by contribution per unit
Strengths of break even
Simple plus straightforward way of discovering whether a business plan is likely to succeed financially
Can show different levels or profit arising from various levels of output
Weakness break even
May be unreliable as it is a forecast plus difficult to predict demand
Sales are unlikely to be the same as demand
Any margin is divided by what
Sales revenue
Examples of management accounting data
Decision trees, revenue cost and profit objectives
Budgets and break eben
Examples of financial accounting data
Cash flow statement
Data on profitability
Internal plus short term finance
Debt factoring
External and long term finance
Ordinary share capital ,venture capital and loan
Debt factoring and advantage
Usually a bank buys the right to collect money from credit sales of a business
-improved cash flow in short term
Increase efficiency
Debt factoring disadvantage
Loss of revenue
High cost
Bank overdraft and advantage
When a bank allows a group to overspend its current account in the bank up
Flexible and security is not usually required
Disadvantage bank overdraft
Flexible interest rates and banks can demand immediate repayment
Hdjej
Dndnnr
