3.5.1 Flashcards
(22 cards)
What are financial objectives?
Goals or targets that relate to the business’s financial performance
List 4 benefits that derive from setting financial objectives
- Growth
- Motivation
- Improve co-ordination
- Suppliers can confirm financial viability of the business
- Shareholders can assess business easier
- Provides focus
- Consistent cash flow
- Sets limits, can budget with this
What are the 5 typical financial objectives?
- Revenue
- Cost
- Profit
- Cash Flow
- Return on Investment
What is revenue?
Money brought into the business from sales
Why is increasing revenue going to be a key concern for the finance department?
- Costly
- Customers may brand switch
How could revenue be increased?
- Increase/decrease selling price (depending on PED)
- Promotion
- Increase quality
What are cost objectives used for?
To reduce fixed, variable or total costs by a certain amount of £s or by a certain %
How might cost cutting affect the functional areas?
- Marketing = Less advertisements
- HR = Cut jobs, less staff training, more redundancies
- Finance = Must retain profits and reduce spending
- Operations = Lower quality goods due to supplier switching, stores closing
What is profit?
Financial income after deducting costs
What will profit be used for in a business?
- Dividends
- Investments
- Retained profits
Why might a business face criticism if it has a profit maximisation target? List 2 reasons
- Charging too much
- Unethical supplier
- Low quality goods
- Not eco friendly
- May not care about employees or customers (poor reputation)
What might be some consequences resulting from a business recording profits lower than forecast? List 2
- Less investors
- Lower share price (hostile takeover)
- Can’t reinvest as much
- Bad publicity
- Increased debts
- Customers may not buy goods on credit
What is cash flow?
The movement of money in and out of the bank
What is return on investment (ROI)?
The amount of profit made compared to how much has been put it
What is the formula for ROI
Operating profit
———————— x 100
Capital employed
What is the formula for capital employed?
Total equity + NCLs
What is the difference between cash and profit?
Cash flow = Difference between inflows and outflows
Profit = Difference between sales revenue and expenditure
Can a profitable business be cash poor? Why? (Give an example)
Yes - for example if the business has sold a good on credit this would make them profitable as the invoice has been agreed, but cash poor as the payment has not yet been received
Which is needed for short term and which is needed for long term (profit and cash)?
- Cash = short term
- Profit = Long term
What is gross profit?
The selling price of a product minus its production costs. It is the profit per unit.
What is operating profit?
The net income derived from a company’s core operations before paying taxes
What is profit for the year?
Profit made after deducting operating costs from gross profit
