Unit 5: Flashcards
What are financial objectives?
Targets related to finance, such as revenue, costs, profits, cash flow, return on investment.
Give examples of financial objectives.
Revenue objectives, cost minimisation, profit maximisation, cash flow targets, return on capital employed (ROCE).
What internal factors influence financial objectives?
Corporate objectives, characteristics of the firm, operational and marketing performance.
What external factors influence financial objectives?
Economic conditions, competitor actions, interest rates, exchange rates, inflation.
What is revenue?
The income generated from sales.
Formula: Revenue = Price × Quantity.
What are costs?
Expenditures incurred in producing goods/services.
What is profit?
The financial gain.
Formula: Profit = Revenue - Costs.
What are fixed costs?
Costs that do not change with output, e.g., rent.
What are variable costs?
Costs that change with output, e.g., raw materials.
What is break-even analysis?
Determines the level of output where total revenue = total costs.
What is the break-even formula?
Break-Even Point = Fixed Costs / (Price Per Unit - Variable Cost Per Unit)
What is contribution per unit?
Selling Price - Variable Cost per Unit.
What is margin of safety?
Actual output - Break-even output.
What is budgeting?
Setting financial targets for revenue and expenditure.
What is favourable variance?
When actual results are better than budgeted.
What is adverse variance?
When actual results are worse than budgeted.
Advantages of budgeting?
Improves planning, coordination, motivation, control.
Limitations of budgeting?
Can be time-consuming, based on forecasts, may demotivate if unrealistic.
What is cash flow?
The movement of money in and out of a business.
What is cash inflow?
Money received by the business (e.g. from sales).
What is cash outflow?
Money paid out (e.g. wages, rent, suppliers).
Why is cash flow important?
Ensures a business can meet short-term liabilities.
Methods of improving cash flow?
Speeding up inflows, delaying outflows, overdraft, factoring.
What is gross profit?
Revenue - Cost of Sales.
What is operating profit?
Gross Profit - Operating Expenses.
What is profit for the year?
Operating Profit - Interest and Taxes.
What is profit margin?
Profit as a percentage of revenue.
How to improve profitability?
Increase revenue, reduce costs, improve efficiency.
Internal sources of finance?
Retained profits, sale of assets.
External sources of finance?
Bank loans, overdrafts, share capital, venture capital, trade credit.
Short-term sources of finance?
Overdrafts, trade credit.
Long-term sources of finance?
Loans, share capital, retained profit.
Factors influencing finance choice?
Cost, risk, control, financial position, purpose of finance.
Give examples of financial objectives.
Revenue objectives, cost minimisation, profit maximisation, cash flow targets, return on capital employed (ROCE).
What is variance analysis?
the difference between a company’s actual financial performance and what was planned in their budget
