3.5 Decision making to improve financial performance Flashcards
(51 cards)
What are financial objectives?
The specific aims and goals of the finance department within an organisation
What are some possible types of financial objectives?
Revenue / costs / profits / cash flow / capital expenditure levels / capital structure / return on investment / debt as a proportion of long-term funding
What are the benefits of setting financial objectives?
-Focus for decision making
-Benchmark against which success and failure can be measured
-Gives teams and departments a common purpose
-Improve efficiency
-Allow shareholders to assess whether the business will provide a worthwhile investment
-Outside organisations (supplers/customers/regulators) can confirm the financial viability of the business
What are the difficulties of setting financial objectives?
-Difficult to make them realistic
-External changes are beyond the control of the business
-Difficult to measure certain objectives
-Responsibilty of achieving objective may rest on financial department but really it depends on other departments aswell
-May conflict with other non-finacial objectives
What is a return on investment?
A measure of the efficiency of an investment in financial terms. Can then be used to compare the returns of an alternate investment.
How is the ROI calculated?
(ROI/cost of investment) x 100 = %
What is debt?
Money owed by an economic agent to another economic agent
What is long-term funding?
All funding available to a business that doesnt need to be paid within a year:
-Share capital = total equity
-Debt that doesnt need to be payed within a year.
ADDED TOGETHER
What is debt as a proportion of long-term funding?
How is it calculated?
A measure of how much of the firms long term funding is debt and how much is shareholder funds. Shareholder funds require no interest payments as shareholders are rewarded with dividends.
(debts that dont need to be payed within a year / total long term-funding) x 100 = %
What is the problem with debt?
-Interest payments must be made, this can create cash-flow problems and increase a firms fixed costs.
What is cash-flow?
The amount of money flowing in and out of a business over a given period of time
What is ‘net cash flow’?
Sum of cash inflows - sum of cash outflows
over a given period of time
Why may a profitable firm be short of cash-flow?
-High inventory levels, meaning its wealth is in assets
-Sales are on credit, wealth is stored in debtors
-Paying out dividends / paying back loans
-Investment into fixed assets
What is liquidity?
The ability to convert an assett into cash without loss or delay
What is profit?
Total revenue - Total costs
What are the 3 different types of profit?
1) Gross profit = revenue - total costs of sales
Total Costs of Sales = it’s the total amount of money you spend on materials, labor and manufacturing expenses to create your product. Excludes indirect expenses such as rent of offices, warehouses, advertising and shipping after good has sold.
Used to indicate how well a business is adding value to its inputs
2) Operating profit = gross profit - operational costs
Profit made from trading, companys best measure of performance
3) Profit for the year = profit available to owners for the year
Includes all revenue and costs including sales of assetts.
Useless measure for shareholders as a business could sell an expensive assett and that is included
What are some examples of revenue objectives?
Sales maximisation
Increase in sales revenue
Exceeding sales volume of competitor
What are some examples of cost objectives?
Achieve a cost reduction in raw materials (careful of quality)
Reduce wage cost per unit
Lower levels of wastage
Reduce variable costs per unit to improve production efficiency
What are some examples of profit objectives?
Profit maximisation
Increases in profit
What are some examples of cash flow objectives?
Maintaining a min. monthly closing balance
Reduce bank overdraft
Maintain a certain level of liquid assetts
Setting contingency fund levels
What are the benefits of cash-flow to a business?
-Stay out of debt, reduced costs through interest payments
-Payroll is easier, improving employee morale
-Invest / upgrade / replace when required
-Grow business
What is the capital structrure of a business?
The balance of debt capital and equity capital
What is debt capital made up of?
Dependitures = External source of funding in return for regular fixed interest payments and a re-payment date, usually for a long time (10yrs +). It can be sold to another economic agent
Loans
What are some external influences on financial objectives?
PESTLE
Market factors
Competitor actions
Suppliers