Unit 5 Flashcards
What are financial objectives?
Targets related to financial performance of business, often linked to profit, revenue, costs or return on investment
Examples of financial objectives?
- Increase operating profit by 10%
- Improve cash flow
- Achieve a return on investment (ROI) of 15%
- Reduce unit costs by 5%
What are the main types of financial objectives?
- Revenue objectives
- Cost and profit objectives
- Cash flow objectives
- Capital structure objectives
- Return on investment objectives
What factors influence financial objectives?
- Corporate objectives
- Internal resources
- Competitor performance
- The economy
- Stakeholder pressure
What is a banana sheet?
Snapshot of business’s financial position at given time shows assets, liabilities, and equity.
What is an income statement?
Financial document, shows revenue, costs and profit / loss over specific time period
What is profit for the year?
Net profit after all costs, taxes, and interest have been deducted.
What is the formula for gross profit?
GrossProfit=Revenue−CostofSales
What is the formula for operating profit?
OperatingProfit=GrossProfit−OperatingExpenses
What is the formula for net profit?
NetProfit=OperatingProfit−InterestandTax
What is the formula for gross profit margin (%)?
(gross profit / revenue) X I00
What is the formula for operating profit margin (%)?
(Operating profit/ revenue ) x 100
What is the formula for return on capital employed ( ROCE)?
(operating profit/ capital employed) X 100
What does a high ROCE mean?
Efficient use of capital to generate profit — good for investors.
What are the internal sources of finance?
- Retained profit
- Sale of assets
- Reducing working capital
What are external sources of finance?
- Bank loans
- Overdrafts
- Share capital
- Trade credit
- Venture capital
- Government grants
What are pros and cons of retained profit?
✅ No interest
✅ Immediate
❌ Limited by past profits
❌ May cause shareholder dissatisfaction
What is venture capital?
Finance provided by investors to high-risk, high-growth businesses in return for equity
What is the formula for break-even output?
Break- even output = fixed costs / (selling price - variable cost per unit)
What is the contribution per unit?
SellingPrice−VariableCostperunit
What is the formula for margin of safety?
ActualOutput−Break-evenOutput
Pros and cons of break-even analysis?
✅ Simple to understand
✅ Helps set targets
❌ Based on assumptions
❌ Doesn’t account for external factors
What is the cash flow forecast?
Projection of cash inflows & outflows over a period, used to predict cash shortages / surplus
Why is cash flow important?
- Ensures liquidity
- Prevents insolvency
- Helps planning and decision-making
Causes of cash flow problems?
- Poor sales
- High overheads
- Late customer payments
- Overtrading
How to improve cash flow?
- Shorten credit terms
- Reduce stock levels
- Lease instead of buy
- Delay payments to suppliers
