5. financial objectives and measuring profit Flashcards
(31 cards)
what are financial objectives?
financial goals that business wants to achieve. these are usually specific targets set in a specific amount of time for example, increase profits by 10% within three years
who will financial objectives me set by?
financial managers who also help businesses achieve their corporate objectives
what are some positives of setting financial objectives?
improve coordination between teams, act as focus for decision making and allow shareholders to judge whether a business would be a worthwhile investment
what do business base their financial objectives from?
financial data such as cash flow and profit margin to asses their financial position before setting objectives
what are revenue objectives?
revenue objectives often set to increase the value or volume of sales. for example, ‘increase sales revenue by 5% in the next year’ or ‘beat a competitors monthly sales’
what are cost objectives?
cost objectives usually set to minimise cost for example ‘reduce costs of raw material by 10% over the next year’
what are positives of setting cost objectives?
if costs are reduced and the business still sells the same number of products at the same price, this will increase its overall profits
what are limitations of reducing costs?
businesses have to be careful when cutting costs that is doesn’t reduce the quality of their product or services, or raise ethical questions about how they operate- otherwise sales may drop and they’d end up with lower profits instead of higher profits
what are profit objectives?
profit objectives might set a target figure for profit or for a percentage increase from the previous year. since revenue, costs and profit are closely linked , achieving revenue and cost objectives can help achieve profit objectives
what is the difference between cashflow and profit ?
cash flow is all the money flowing in and out of the business over a period of time, calculated at the exact time it enters or leaves the bank account/till whereas profit includes all transactions that will lead to cash in or out now or in the future
why are cash flow calculations the most important thing for a business in the short-term?
businesses need cash to survive
what are ways in which a business could damage their cashflow ?
- if businesses allows payments to be made on credit this may damage their cash flow
- spending a lot of money on materials/ machinery the outflow of cash could lead to crisis
how could a business producing too much lead to potential crisis? what does it been for a business to be insolvent? what is this called?
if a business produces too much they’ll have to pay suppliers and and staff so much that they’ll become insolvent (unable to pay debts, if a sole trader or partnership is insolvent the owner may have to declare banktupcy) before they have the chance to get paid by their customers. this is called over trading
why are cashflow objectives put in place?
prevent cashflow problems, spread revenue or costs more evenly throughout the year, require a specified amount of liquid assets (an asset that can be turned into cash quickly) or target a minimum cash balance
How to calculate percentage change in profits?
current years profit - previous years profit divided by previous years profit x 100
what does return on investment measure?
how efficient investment is- compares the return from a project to the amount of money that’s been invested in it. the higher the ROI, the better
what are positives of ROI?
- set target value for the ROI of an investment
- use it to compare profitability of two potential investments
why businesses work out percentage change in profit.
shows comparison of how well they are performing. if profit has dropped business’ need to investigate why and take action
what are methods to increase profits?
- increasing prices (if the demand of their product is inelastic)- this could reduce sales
- reducing prices to increase demand
- reduce cost of production- this could make lower quality product
- advertising to increase demand - this can be expensive
- improving quality can reduce costs of return and product that are not suitable for sale
what is gross profit?
gross profit is the amount left over when the cost of sales is subtracted from sales revenue. cost of sales includes the costs directly related to the making of the product
what does operating profit take into account?
takes into account all revenues and costs from regular trading, but not any revenues or costs from one-off events such as sale or purchase of another business. Operating profit considers both the cost of sales and operating expenses, such as administrative expenses.
what does it mean if gross profit is increasing but its operating profit is decreasing?
usually means the company is not controlling its costs
what does profit for the year take into consideration?
takes consideration profit or loss from one-off events and financial costs. its the measure of profit that dividend payments are based on
examples of one-off events and financial cost?
interest payments and tax
