Unit 5.1- Setting financial objectives

Question 1

What is a financial objective?

Answer 1

Financial objectives can be described as goals or targets that relate to the business’s financial objectives.

Question 2

What are the two types of cost objectives?

Answer 2

• Cost minimisation

- Reducing costs to maintain profit margins

Question 3

What are profit objectives?

Answer 3

Can relate to previous years and any expected changes in the future

Question 4

Why may it be easier to raise capital for investment?

Answer 4

• The business hasn’t borrowed excessive amounts already
• The business is purchasing non current assets
• The business is a company and sell additional shares to raise funds

Question 5

How to work out return on investment?

Answer 5

operating profit/capital invested x 100

Question 6

Name the two types of decisions made by managers in relation to the business’s capital structure ?

Answer 6

• Borrow funds - pay interest

- They can choose to sell shares - pay more dividends, lose control

Question 7

What affects capital structure objectives?

Answer 7

• Interest rates
• Inflation
• Income

Question 8

What does highly geared mean?

Answer 8

More than 50% of the companies capital is borrowed

Question 9

What are internal influences on financial objectives?

Answer 9

• Overall business objective - financial objective must assist the business in achieving its overall or corporate objectives such as growth
• Nature of product - determined by cash flow cycles or price sensitivity
• Senior managers - if they hold shares then they may look at profit objectives or they may seek recognition that accompanies successful achievement of growth

Question 10

What are external influences on financial objectives?

Answer 10

Competitive environment - actions of competitors
Economic environment - implications for consumer spending and borrowing
Technological environment - rapidly changing technology
Political and legal environment