Section Five - Financial Decisions Flashcards
(25 cards)
What is a financial objective?
A specific goal or target relating to financial performance.
What can the financial objectives be based on?
-Revenue
-Costs
-Profit
-Cash flow
-Investment levels
-Capital structure
-Return on Investment
-Debt as a proportion of long term funding
What are the benefits of setting financial objectives?
-Provides a focus for the business as a whole.
-Focus for decision making & effort
-Can measure success & failure
-Reduces the risk of business failure
-Improve coordination & efficiency
-Information for shareholders -> priorities of management
-Allows external stakeholders to confirm financial viability
-Provides a target to help make investment decisions
What are the difficulties of setting financial objectives?
-Not always realistic
-External changes
-Difficulty in measuring
-May conflict with other objectives
-Responsibility may lie with finance department, when it is a whole business priority.
What does it mean when a business is insolvent?
The business can no longer pay its debts off.
What is return on investment(ROI)?
The measure of efficiency of an investment in FINANCIAL terms, used to compare the financial returns of alternative investments.
How do you calculate the percentage ROI?
Return on investment(%) = Return on investment(£) /cost of investment(£) X 100
How is the return of investment calculated (£)?
Return on investment= financial gain from investment - costs of investment.
Why might companies use ROI?
Companies might set a target value for the ROI of an investment or use it to compare the profitability of two potential investments.
What’s better, a higher or lower ROI?
The higher the ROI, the better.
What is profit?
Profit= revenue-total costs
What is cash flow?
The money flowing in and out of the business on a day to day basis.
Why is cashflow within a business so important?
To prevent a firm from becoming insolvent.
What is net cash flow?
The money left over when a business takes its outflows from its inflows.
What is the calculation for net profit?
sales-variable costs-fixed costs
What are the main cash inflows within a business?
-Money invested by business owners
-Loan from the bank
-Income from sales
What are the main cash outflows within a business?
-Wages and training
-Raw materials
-Advertising
-Rent,mortgage, and bills
-Taxes
-Interest on loans
-Maintenance and repairs
Define what gross profit is.
How efficiently a business converts raw materials into finished goods and how much value they add.
Give the equation for gross profit.
Revenue - cost of sales
Give the equation for operating profit (net profit).
Gross profit - expenses
Define what profit for the year is.
This is the profit available to shareholders and it includes the sale of assets, interest payments, and tax.
List some revenue objectives.
-Sales maximisation - volume/value
-Targeting a specific increase in sales revenue
-Exceeding the sales of a competitor
-Revenue growth (% or value)
-Market share
List some cost objectives.
-Cost minimisation -this could be in terms of unit cost which are then further linked to efficiency, labour productivity, and capacity utilisation.
-Productivity- in terms of unit per worker and capacity utilisation.
List some profit objectives.
-Specific level of profit (in absolute terms)
-Rate of profitability (as a % of revenue)
-Profit maximisation
-Exceed industry or market profit margins
