5.1a Financial Objectives Flashcards Preview

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Flashcards in 5.1a Financial Objectives Deck (17):
1

Financial objectives definition

Targets that the financial function of the business wishes to attain

2

Why do businesses set financial objectives?

- As a focus for decision making
- To give direction
- To improve efficiency

3

Financial objectives examples

- Revenue
- Cost
- Profit

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Ways businesses can minimise costs

- Reduce wage costs per unit
- Cost reduction with raw materials
- Lowering levels of wastage

5

Capital definition

Assets owned by a business that will enable it to provide its product

6

Two capital methods

1. Debt capital
2. Equity capital

7

Debt capital definition

Use funds that are borrowed, such as bank loans

8

Equity capital definition

Money provided by selling shares in the business or profit that is put back into the business

9

What does debt to equity ratio decide?

How much debt funding it would be happy to have in relation to equity funding

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Debt to equity ratio formula

Debt to equity ratio = (Debts ÷ long term funding) x 100

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What is long term funding?

Equity funding, but it also includes any loans that are repayable in over a year

12

Two reasons a business may invest

1. To buy new capital goods
2. To replace/renew existing capital goods

13

Return on investment formula

ROI = ((financial gains from investment - total cost of investment) ÷ initial cost of investment) x 100

14

What can the results of ROI be used for?

1. To compare potential investment projects
2. To compare to the interest rate the business might borrow money at to see if the ROI is greater

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Advantages of ROI

- Can compare ROI of several projects
- Can use information to make decisions

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Disadvantages of ROI

- Sometimes difficult to calculate exactly the return on an investment
- Interpretation of results must consider a lot of other internal and external variables

17

Factors influencing investment

- Expected ROI
- Interest rates of money borrowed
- Finance available

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