Financial Management (Unit 5) Flashcards
(26 cards)
What are financial objectives?
Targets relating to financial performance, such as revenue, costs, profits or cash flow.
What are examples of financial objectives?(6)
Revenue objectives
Cost minimisation
Profit objectives
Cash-flow targets
Return on investment (ROI)
Capital structure objectives
What is return on investment (ROI) and how is it calculated?
ROI = (Return ÷ Investment) × 100
It measures the efficiency of an investment.
What are the internal influences on financial objectives? (2)
Corporate objectives
Nature of the product/service
What are the external influences on financial objectives? (2)
Competitor actions
Economic environment
What is gross profit?
Gross profit = Revenue − Cost of sales
What is operating profit?
Operating profit = Gross profit − Operating expenses
What is profit for the year?
Profit for the year = Operating profit − Tax and interest
What is the mnemonic to remember the order of gross, operating, and for the year profits
GOYO-(Gross, Operating, profit fOr the Year)
What is the formula for gross profit margin?
Gross profit margin = (Gross profit ÷ Revenue) × 100
What is the formula for operating profit margin?
Operating profit margin = (Operating profit ÷ Revenue) × 100
What is the formula for profit for the year margin?
Profit for the year margin = (Profit for the year ÷ Revenue) × 100
What are the two main types of finance?
Internal finance (e.g. retained profit, sale of assets)
External finance (e.g. bank loans, share capital)
What are the advantages of internal finance? (2)
No interest payments
No loss of control
What are the disadvantages of internal finance? (2)
Limited amount available
May not be sufficient for large investment
What are the advantages of external finance? (2)
Access to large sums of capital
Can spread costs over time
What are the disadvantages of external finance? (2)
Interest payments or dividends
Potential loss of control (e.g. through share issues)
What are ways to improve cash inflow? (2)
Reduce trade credit period offered to customers
Encourage prompt payment
What are ways to reduce cash outflow? (2)
Delay payment to suppliers
Reduce unnecessary costs
What is the difference between profit and cash flow?
Profit is the surplus after costs, while cash flow is the movement of money in and out of the business.
What are the ways to improve profitability? (2)
Increase selling price
Reduce variable/fixed costs
What are potential drawbacks of cutting costs to increase profit? (2)
May reduce quality
Could damage long-term brand reputation
What are payables and recievables
Payables - the number of days a business has to pay back the money owed to its suppliers
Receivables - the number of days a debtor has to pay back the money owed to the business
What is ideal for payables and recievables
Payables>Recievables
