3.5.1 Financial Management Flashcards
(18 cards)
What is the purpose of setting financial objectives?
Financial objectives help businesses measure success, guide decision-making, monitor progress, and provide targets for managers and employees. They support overall corporate objectives and improve accountability.
What is a financial objective?
A specific, quantifiable goal relating to a business’s financial performance over a period of time (e.g. increase revenue by 10% in 12 months).
What are common types of financial objectives?
- Revenue objectives
- Cost objectives
- Profit objectives
- Cash flow objectives
- Return on investment objectives
What is Return on Investment (ROI)?
ROI measures how efficiently a business uses its investments to generate profit.
Formula:
ROI (%) = (Return / Investment) × 100
Why is ROI a useful financial objective?
It allows comparison of the profitability of different investments and supports better capital allocation decisions.
What are revenue objectives?
Targets related to the income generated from business activities. Example: “Increase revenue by 15% over the next financial year.”
What are cost objectives?
Targets aimed at reducing or controlling costs, such as “reduce production costs by 8% within 6 months.”
What are profit objectives?
Targets related to increasing overall profitability. E.g., “Increase operating profit margin to 12%.”
What are cash flow objectives?
Targets that ensure sufficient liquidity to meet day-to-day expenses. E.g., “Maintain positive net cash flow each quarter.”
Why is cash flow important in financial management?
A business can be profitable but still fail if it runs out of cash to pay bills. Positive cash flow ensures liquidity.
What is the distinction between cash flow and profit?
• Cash flow: Actual money entering and leaving the business.
• Profit: Revenue minus costs over a period, which may not reflect cash movements (e.g., credit sales).
What is gross profit?
Gross profit = Revenue – Cost of Sales. It shows profit from core operations before overheads.
What is operating profit?
Operating Profit = Gross Profit – Operating Expenses. It indicates profitability from normal business operations.
What is profit for the year (net profit)?
Profit for the year = Operating Profit – Interest – Tax. It represents the final profit available to shareholders.
Why distinguish between gross, operating, and profit for the year?
It helps analyse cost structure and financial health:
• Gross profit: efficiency in production/sales.
• Operating profit: efficiency including overheads.
• Profit for the year: true financial performance after all costs.
What factors influence financial objectives?
• Business size and status
• Economic conditions
• Competitor performance
• Past financial performance
• Stakeholder expectations
• Internal resources
How can financial objectives support strategic planning?
They align financial performance with long-term goals, allowing better resource allocation and performance monitoring.
What are the risks of poor financial objective setting?
Unrealistic targets can demotivate staff, mislead investors, and lead to poor decision-making.
