Unit 5: Financial performance Flashcards
What is a financial objective?
A specific goal or target relating to the financial performance, resources and structure of the business
What are the benefits to using financial objectives?
- A focus for the entire business
- Important measure of success or failure
- Reduce the risk of business failure
- Provide transparency to shareholders
- Help coordinates different functions
- Context for making investment decisions
What are the types of financial objectives?
Revenue, cost, profit, cash flow, investment for return, capital structure
What are the internal influences on financial objectives?
Business ownership, size and status of business, functional objectives
What are the external influences on financial objectives?
Economic conditions, competition, social and political change
What does and income statement record?
A business’ sales revenue over a trading period and all relevant costs incurred as well as the profit or loss
What are cost of sales also known as?
Direct costs, variable costs
What are the costs that are not directly related to producing the goods or service called?
Expenses
What is profitability?
The measure of a business’ ability to generate profits from its operations
What is return on investment?
A performance measure used to evaluate the efficiency of an investment as it measures the sales in comparison to the cost of investment
What is meant by improving profit in absolute terms?
Increase the total profit
What is meant by improving profit in relative terms?
Improving the profit margin or return on capital
What are simple ways to increase profit?
Increase quantity sold and selling price, reduce variable costs, reduce fixed costs. reduce product range, outsource non-essential functions
What is cash flow?
The money coming in and going out of a business over a period of time
Why is cash flow so important?
- Cash flow problems are the main reason for business failure
- Cash flow is unpredictable
- Cash is limited
What is a cash flow forecast used for?
It predicts the cash inflows and outflows over a period of time, usually 12 months
Why should a cash flow forecast be produced?
- Advanced warning of cash shortages
- Financial control
- Business knows that it can pay suppliers
- Obvious in showing customers that have problems paying
- Provides reassurance to investors
What are debtors?
Amounts owed to a business e.g. by customers
What are creditors?
Amounts owed by the business e.g. to suppliers
What are inventories?
Cash tied up in raw materials, work in progress and finished goods
Give examples of ways to manage amounts owed by customers
- Credit control (offer less trade credit, establish credit limits for new customers, credit checking, chasing up bad debts)
- Cash discounts for prompt payment
- Improved record keeping e.g. timely invoices
- Debt factoring (selling off debtors to a third party)- invoice discounting
Give examples of ways to manage inventories
- Stock holding ties up cash
- Ensure stock is being turned over
Give examples of ways to manage cash paid to suppliers
- Negotiate improved terms for trade credit
- Delayed payment
What are some benefits of good cash flow management?
- Reduced borrowing costs
- Good relations with suppliers
- Public relations
