Setting Financial Objectives

Question 1

The value of financial objectives

Answer 1

• Enables managers to identify aspects of the performance of the business that are causing problems at the earliest possible stage.
• Can be motivating for employees at all levels in the business.

Question 2

The distinction between cash flow and profit

Answer 2

• Profit- A business makes a profit if its revenue is greater than its expenditure.
• Cash flow- This relates to the timing of payments and recipes. Cash flow is important in the short term as a business must pay creditors.

Question 3

Why might the business not have large amounts of cash if profitable

Answer 3

• The business might sell large numbers of goods or services at profitable prices by offering customers days grace before they have to pay.
• Might hold large amounts of expensive inventories for customers to view before making a choice.
• A business may have paid for assets and used large sums of cash to do so.

Question 4

Gross profit

Answer 4

• This form of profit is calculated by deducting direct costs from its sales revenue.
• This gives a broad indication of the financial performance of the business without taking into account other costs.

Question 5

Operating profits

Answer 5

• This type of profit takes into account all earnings from regular trading activities and all the costs associated with this activities.
• It does not include some expenditure a business may undertake.

Question 6

Profit for the year

Answer 6

• This measure of profit takes into account a business’s income from all of its sources.

Question 7

What are some possible cash flow objectives

Answer 7

• Reduce borrowings to target level.
• Minimise interest costs.
• Reduce amounts held in inventories or owed by customers.
• Reduce seasonal swings in cash flow.
• Net cash flow as a percentage of net profit.

Question 8

Examples of revenue objectives

Answer 8

• Revenue growth.
• Sales maximisation.
• Market share.

Question 9

Cost objectives examples.

Answer 9

• Lower unit costs.
• Higher gross profit margins.
• Higher operating profits.
  Improved cash flow.
• Return on investments.

Question 10

Profit objectives examples

Answer 10

• Specific level of profit.
• Rate of profitability.
• Profit maximisation.
• Exceed industry or market profit margins.

Question 11

Investment objectives examples

Answer 11

• Level of capital expenditure- Set at either an absolute amount or as a percentage of revenues.
• Return on investment- Usually set as a target % return.

Question 12

Internal factors on financial objectives and decisions

Answer 12

• The overall objectives of the business.
• The nature of the product that is sold.
• The objectives of the business’s senior managers.

Question 13

External factors on financial objectives and decisions

Answer 13

• The competitive environment.
• The economic environment.
• The technological environment.
• The political and legal environment.