5.1a - Financial Objectives Flashcards
Why does a business set financial objectives?
- As a focus for decision making
- A yardstick to judge success or failure
- Give direction
- Improve efficiency
Examples of financial objectives:
- Revenue
- Cost
- Profit
- Investment
How will a business try to reduce its costs?
- Lower raw material costs
- Reducing wage costs per unit
- Lowering levels of wastage
- Improving efficiency to reduce variable costs per unit
Capital definition
The assets owned by a business that will enable it to provide its product
What are the two key methods of raising capital?
- Debt capital
- Equity capital
Debt capital definition
Funds that are borrowed
Equity capital definition
Money raised through selling shares or profit that is reinvested
Debt to equity ratio definition
How much debt funding a business has in relation to equity funding
What does long-term funding include?
Equity funding and any loans repayable in over a year
Debt to equity ratio formula
(Debts / long term funding) X 100
What does it mean if the debt to equity ratio is high?
More of the financing for a business is from borrowing
Disadvantages of a high debt to equity ratio:
Business is less likely to get further loans
Why will a business invest?
- Buy new capital goods
- Replace/renew existing capital goods
Return on investment formula
((Financial gains from investment - total cost of investment) / initial cost) X 100
How can the results of ROI be used?
- Compare potential investments to see which provides the better ROI
- Compare to interest rate that they business may borrow money at to see if ROI is greater to justify purchase
