UNIT 5- decision making to improve financial performanceš¤ Flashcards
what is the definition of a financial objective?
a specific goal or target of relating to the financial performance, resources and structure of a business
what are the key benefits of using financial objectives?
a focus for the entire business, important measure of success of failure for the business, reduce the risk of business failure, helps to coordinate the different business functions
how is profit closely linked to cash flow?
profits are the main source of funds for an established business. revenues eventually turn into cash inflows, costs eventually turn into cash outflows
how does cash flow differ from profit?
timing differences
- sales to customers made on credit
-payments to suppliers
the way fixed assets are accounted for
-payment for fixed asset=cash outflow
-cost of fixed asset
cash flows arising from the way the business is financed
- inflows from shareholders, bank loans, factoring etc
-payments of dividends
what is the explanation of cost of sales?
direct costs of generating revenues go into ācost of salesā. includes the cost of raw materials, components, goods bought for resale and the direct labour costs of production
what is the explanation of gross profit?
the difference between revenue and cost of sales.
what is the explanation of administration expenses?
operating costs and expenses that are not directly related to producing the goods or services are recorded here. includes distribution costs and the wide range of expenses or overheads that a business incurs.
what is the explanation of operating profit?
records how much profit has been made in total from the trading activities of the business before account is taken of how the business financed.
what is the explanation of finance expenses?
interest paid on bank and other borrowings, less interest income received on cash balances. useful figure for shareholders to assess how much profit is being used up by the funding structure of the business
what is the explanation of taxation?
an estimate of the amount of corporation tax that is likely to be payable on the profits for the period.
what is the explanation of profit for the year?
the amount of profit that is left after the tax has been accounted for.shareholders then decide how much is paid out to them in dividends and how much is left for the business
what is a cost minimisation objective?
aims to achieve the most cost-effective way of delivering goods and services to the required level of quality
what are the key benefits of effective cost minimisation?
lower unit costs, higher gross profit margin, higher operating profits, improved cash flow.
what are the most common profit objectives?
specific level of profit, rate of profitability, profit maximisation
what are some possible cash flow objectives?
reduce borrowings to target level, minimise interest costs, reduce amounts held in inventories, reduce seasonal swings in cash flows
what is the capital structure of a business?
equity- amounts invested by owners of the business. i.e. share capital, retained profit.
debt - finance provided to the business by external parties. i.e. bank loans, other long-term debt.
what are examples of capital structure objectives?
reasons for higher equity in the capital structure
- where more flexibility is required
- where there is greater business risk
reasons why high levels of debt can be an objective
-where interest rates are very low
- where profits and cash flows are strong
what are examples of internal influences on financial objectives?
business ownership
size and status of the business
other functional objectives
what are some examples of external influences on financial objectives?
economic conditions
competitors
social and political change
what are the main cash inflows?
cash sales, receipts from trade debtors, grands, loans from the bank
what are the main cash outlows?
payments to suppliers, tax on profits, repayment of loans, wages and salaries
what is the key to effective cash flow forecasting?
updated regularly
allows for unexpected changes
is updated regularly
what are common problems with cash flow forecasts?
sales prove lower than expected
customers do not pay up on time
costs prove higher than expected
imprudent cost assumptions
describe the steps to the working capital cycle.
inflow, inventories ordered from supplier, production turns inventory into products, out flow, finished goods held until a customer is found, products sold to customers, customers pay for their purchases