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BUSINESS - Unit 5: Decision making to improve financial performance > Financial objectives > Flashcards

Flashcards in Financial objectives Deck (47)
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1

what are FINANCIAL OBJECTIVES?

the monetary targets a business wants to achieve within a set period of time

2

name the 6 financial objectives

- return of investment
- capital structure
- revenue
- costs
- profit
- cash flow

3

define 'return'

how much money is business getting back

4

define 'investment'

how much capital is being used within the business

5

what is ROI (Return of Investment)?

measure of a firms profitability & performance

6

what are ROI targets set as?

a percentage

7

who will be very interested in ROI?

shareholders

8

what does ROI link to?

- benchmark to industry standard
- internal benchmarking
- external factors e.g. interest rates

9

what does ROI allow for comparisons between?

alternative investment opportunities

10

what is the calculation formula for ROI?

operating profit / capital invested (x100)

11

define capital structure

the relative ways in which capital has been raised i.e. retirement of equity to debt

12

what is debt?

anything the business OWES (borrowed from financial institutions)

13

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

14

name the 2 sources of long term funding

debt & equity

15

what is long term funding that is debt?

compulsory interest bearing

16

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

17

what does interest represent to the business?

a cost

18

why might a business set a capital structure objective?

to keep the proportion of long-term funding that is debt below a percentage

19

is borrowing money? elaborate

NO, it becomes a problem if you're unable to pay it back

20

define 'gearing'

proportion of long-term funding that is a debt, relationship is referred to as gearing

21

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

22

how do you calculate percentage of long-term debt?

debt (long-term loans)
/
total long term funding (loans & equity)
(X100)

23

define revenue objectives

targets set for the amount money coming into the business from sales in a set period of time

24

define cost objectives

limits set for the amount of money to be spent on expenditure in a set period of time

25

define profit objectives

targets set for the amount of surplus tone achieved in a set period of time

26

what can revenue, cost & profit objectives be set in relation to? example

previous years or each other e.g. profit as a percentage of revenue

27

define cost of sales
example

costs directly linked to the PRODUCTION of goods or services e.g. raw materials

28

how do you calculate gross profit?

revenue - cost of sales

29

define expenses
examples

all other costs associated with the trading of the business e.g. salaries & marketing expenditure

30

how do you calculate operating profit?

gross profit - expenses