Financial objectives Flashcards
(47 cards)
what are FINANCIAL OBJECTIVES?
the monetary targets a business wants to achieve within a set period of time
name the 6 financial objectives
- return of investment
- capital structure
- revenue
- costs
- profit
- cash flow
define ‘return’
how much money is business getting back
define ‘investment’
how much capital is being used within the business
what is ROI (Return of Investment)?
measure of a firms profitability & performance
what are ROI targets set as?
a percentage
who will be very interested in ROI?
shareholders
what does ROI link to?
- benchmark to industry standard
- internal benchmarking
- external factors e.g. interest rates
what does ROI allow for comparisons between?
alternative investment opportunities
what is the calculation formula for ROI?
operating profit / capital invested (x100)
define capital structure
the relative ways in which capital has been raised i.e. retirement of equity to debt
what is debt?
anything the business OWES (borrowed from financial institutions)
what is equity?
any money the business owns i.e. capital that has been invested in business by shareholders, and will stay in it for OVER A YEAR - is normally for the purchase of assets
name the 2 sources of long term funding
debt & equity
what is long term funding that is debt?
compulsory interest bearing
what does debt being compulsory interest bearing mean? what does it increase?
that regardless of profits interest + repayments must be made to financial institutions, increases the degree of risk undertaken by the business especially if interest rates start to rise
what does interest represent to the business?
a cost
why might a business set a capital structure objective?
to keep the proportion of long-term funding that is debt below a percentage
is borrowing money? elaborate
NO, it becomes a problem if you’re unable to pay it back
define ‘gearing’
proportion of long-term funding that is a debt, relationship is referred to as gearing
what does high percentage of long term funding debt mean? why is it thought to be this?
highly geared as it this increases the elect of risk
how do you calculate percentage of long-term debt?
debt (long-term loans)
/
total long term funding (loans & equity)
(X100)
define revenue objectives
targets set for the amount money coming into the business from sales in a set period of time
define cost objectives
limits set for the amount of money to be spent on expenditure in a set period of time
