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A level business > Financial objectives > Flashcards

Financial objectives Flashcards

(63 cards)

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1
Q

What are the key financial objectives in business?

A

Key objectives:

  • Return on Investment (ROI)
  • Revenue Objectives
  • Cost Objectives
  • Profit Objectives
  • Cash Flow Objectives
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2
Q

What is Return on Investment (ROI)?
What is the formula?

A

ROI measures the profitability of an investment relative to its cost.
Formula:

ROI = (Net Return / Cost of Investment) × 100

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3
Q

What are Revenue Objectives?

A

Revenue objectives focus on achieving specific income levels from sales.

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4
Q

What are Cost Objectives?

A

Cost objectives aim to control or reduce business expenses.

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5
Q

What are Profit Objectives?

A

Profit objectives aim to increase profitability over time.

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6
Q

What are Cash Flow Objectives?

A

Cash flow objectives ensure sufficient liquidity to meet obligations.

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7
Q

What are the pros of setting Revenue Objectives?

A
  • Drives business growth.
  • Enhances focus on sales targets.
  • Can measure performance and success.
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8
Q

What are the cons of setting Revenue Objectives?

A
  • Might neglect cost management.
  • Could encourage short-term sales tactics.
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9
Q

What are the pros of setting Cost Objectives?

A
  • Improves profitability by controlling expenses.
  • Ensures better financial management.
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10
Q

What are the cons of setting Cost Objectives?

A
  • Can limit investment in key areas (e.g., R&D).
  • Might affect quality if cost-cutting is too aggressive.
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11
Q

What are the pros of setting Profit Objectives?

A
  • Ensures business sustainability.
  • Focuses on increasing shareholder value.
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12
Q

What are the cons of setting Profit Objectives?

A
  • Might lead to overemphasis on profits, causing ethical issues.
  • Can encourage risky business decisions.
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13
Q

What are the pros of setting Cash Flow Objectives?

A
  • Prevents cash shortages.
  • Ensures liquidity for daily operations.
  • Reduces the risk of insolvency.
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14
Q

What are the cons of setting Cash Flow Objectives?

A
  • Might limit investment opportunities.
  • Focus on cash flow could ignore longer-term growth.
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15
Q

What is Budgeting?

A

Budgeting is the process of forecasting revenues and expenses over a time period.

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16
Q

What is Variance Analysis?

A

Variance analysis compares actual financial performance with budgeted performance.
Types:

  • Adverse Variance
  • Favourable Variance
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17
Q

What is Adverse Variance?

A

Adverse variance occurs when actual performance is worse than the budgeted performance.

Example: Higher costs than expected.

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18
Q

What is Favourable Variance?

A

Favourable variance occurs when actual performance is better than the budgeted performance.

Example: Higher revenue or lower costs.

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19
Q

What is Break-even Analysis?

A

Break-even analysis identifies the point at which total revenue equals total costs.
Formula:

Break-even Output = Fixed Costs / Contribution per Unit

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20
Q

What is Margin of Safety?

A

The margin of safety is the difference between actual sales and break-even sales.
Formula:

Margin of Safety = Actual Sales - Break-even Sales

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21
Q

What is Contribution per Unit?

A

Contribution per unit is the amount each unit sold contributes to covering fixed costs.
Formula:

Contribution per Unit = Selling Price per Unit - Variable Cost per Unit

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22
Q

What is Gross Profit Margin?

A

Gross Profit Margin measures the percentage of sales revenue remaining after subtracting the cost of goods sold (COGS).
Formula:

Gross Profit Margin = (Gross Profit / Revenue) × 100

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23
Q

What is Operating Profit Margin?

A

Operating Profit Margin measures profitability from core operations.
Formula:

Operating Profit Margin = (Operating Profit / Revenue) × 100

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24
Q

What is Profit for the Year Margin?

A

Profit for the Year Margin shows the percentage of revenue that turns into net profit.
Formula:

Profit for the Year Margin = (Profit for the Year / Revenue) × 100

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25
What are Payables and Receivables?
Payables: Amount the business owes to suppliers (liabilities). Receivables: Amount the business is owed by customers (assets).
26
What is Cash Flow Forecasting?
Cash flow forecasting predicts the inflow and outflow of cash over a period to ensure liquidity.
27
What are Internal Sources of Finance?
Internal sources are funds raised from within the business, such as retained profits or asset sales.
28
What are External Sources of Finance?
External sources are funds raised from outside the business, such as loans, share capital, or venture capital.
29
What is Retained Profit?
Retained profit is profit kept within the business instead of being paid out as dividends.
30
What is Sale of Assets?
Selling business assets to raise cash.
31
What is Debt Factoring?
Debt factoring involves selling receivables to a third party at a discounted rate.
32
What is an Overdraft?
A short-term borrowing facility that allows businesses to withdraw more than they have in their bank account.
33
What is a Loan?
A loan is borrowing money that must be repaid over time, with interest.
34
What is Share Capital?
Share capital is money raised by issuing shares in the business.
35
What is Venture Capital?
Investment from external investors in exchange for equity, often in high-growth businesses.
36
What is Crowdfunding?
Crowdfunding is raising funds from a large number of people via online platforms.
37
What are the pros of using Retained Profit as a source of finance?
- No interest payments. - Full control remains with owners. - No debt incurred.
38
What are the cons of using Retained Profit as a source of finance?
- Limited by previous profits. - May reduce the amount available for dividends.
39
What are the pros of using Debt Factoring?
- Immediate cash inflow. - Reduces the risk of bad debts.
40
What are the cons of using Debt Factoring?
- Loss of a percentage of receivables. - Can damage customer relationships.
41
What are the pros of using an Overdraft as a source of finance?
- Flexible and easy to access. - Only pay interest on the amount used.
42
What are the cons of using an Overdraft as a source of finance?
- High interest rates. - Risk of bank calling in the debt.
43
What are the pros of using a Loan as a source of finance?
- Predictable repayments. - Useful for long-term investments.
44
What are the cons of using a Loan as a source of finance?
- Interest payments increase the cost of finance. - Risk of default if repayments are missed.
45
What are the pros of using Share Capital?
- No repayment obligations. - Large sums of money can be raised.
46
What are the cons of using Share Capital?
- Dilution of ownership. - Dividends may be expected by investors.
47
What are the pros of using Venture Capital?
- Provides substantial funding. - Brings in expertise and business guidance.
48
What are the cons of using Venture Capital?
- Loss of control (equity shared). - High expectations for returns.
49
What are the pros of using Crowdfunding?
- No equity loss. - Can engage a wide community of backers.
50
What are the cons of using Crowdfunding?
- Uncertain success rate. - Potential for limited funds.
51
How can a business improve Cash Flow?
By speeding up receivables, negotiating better payment terms, or reducing unnecessary expenses.
52
How can a business improve Profits?
By increasing sales, reducing costs, or improving efficiency in operations.
53
What is Cost Reduction?
Cost reduction refers to actions that lower business expenses to increase profitability.
54
What is Profitability?
Profitability refers to a company’s ability to generate earnings relative to its sales, assets, or equity.
55
What is the difference between Profit and Cash Flow?
Profit is the difference between revenues and costs, while cash flow refers to the actual movement of money in and out of the business.
56
What role does technology play in financial decision-making?
Technology improves decision-making by providing real-time data, forecasting tools, and financial modelling.
57
How do market conditions affect financial decisions?
Market conditions like competition and consumer demand influence pricing, investment, and cost decisions.
58
What is the relationship between financial decisions and business competitiveness?
Effective financial decisions improve cash flow, profitability, and operational efficiency, which enhances competitiveness.
59
What are ethical influences on financial decision-making?
Ethical influences include sustainability, fair wages, and responsible sourcing, which impact investment and funding decisions.
60
What are environmental influences on financial decisions?
Environmental factors such as regulations, sustainability concerns, and resource use impact financial planning and investment.
61
What is the importance of financial planning in business?
Financial planning helps businesses allocate resources efficiently, forecast future needs, and achieve financial objectives.
62
How do financial decisions relate to other business functions?
Financial decisions affect marketing, operations, HR, and strategy, as they influence budgeting, resource allocation, and overall business direction.
63
What is contribution per unit formula
Selling price per unit- variable costs per unit

A level business (6 decks)

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