Finance Flashcards
Four types of financial objectives
Revenue objectives
Cost objectives
Profit objectives
Cash-flow objectives
Two benefits of setting financial objectives
Improves co-ordination, by giving teams and departments a common purpose.
Allows outside organisations, such as suppliers, and shareholders to assess the financial viability of a business.
Two difficulties of setting financial objectives
Can be difficult to set realistic objectives, specially for new business activities.
External changes, such as increased competition, are beyond the control of a business but may affect its ability to achieved its financial objectives.
Gross Profit
Revenue - cost of goods sold
Shows amount remaining after direct cost of goods are subtracted.
Operating Profit
Gross profit - other operating expenses
Shows amount remaining after both direct costs and overheads have been subtracted. E.g rent, utilities.
Profit for Year (Net Profit)
Operating profit + Other profit - net finance costs
Costs of interest on loans and overdrafts, and taxes.
Profitability Margins
Gross, Operating, Net profit margins:
profit/revenue x 100
Look to compare with previous years and competitors.
Increasing Profitability
Sell more volume, may be difficult due to a potential cost increase or working at a too high capacity.
Increase selling prices, may reduce demand.
Reduce fixed costs and overheads, not easy and may cause problems.
Use capacity more fully, produce more units to be sold. High capacity isn’t always effective. Pressure on staff and machinery.
External factors affecting profit
Competition
Market Conditions
Consumer Incomes - affects demand
Interest Rates - affects levels of disposable income and costs.
Break- even point (output)
Fixed Costs/contribution per unit = break even output
Contribution per unit
Contribution looks at whether an individual product is helping the business make profit.
Unit selling prices-unit variable costs)
Total contribution
contribution per unit X no. of units sold.
Margin of Safety
Actual (or planned) output - break even output
Two weaknesses of break-even analysis
Selling prices might change as products are or aren’t sold.
As output rises the business may benefit from more ‘buying power’, which would reduce costs.
Liquidity
Ability to convert an asset into cash without loss or delay.
