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unit 5 Flashcards

1
Q

What are financial objectives?

A

Financial objectives are financial goals that a business wants to achieve. Businesses usually have specific targets in mind, not just profit maximisation, and a specific time period for completion

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2
Q

Who sets financial objectives?

A

Financial managers

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3
Q

What can financial objectives be based on to ensure that they are relevant?

A

Past financial data

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4
Q

What are the 3 types of financial objectives?

A

Revenue objectives
Cost objectives
Profit objectives

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5
Q

What is cash flow?

A

Cash flow is all the money flowing in and out of the business on a day to day basis

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6
Q

Why are cash flow objectives put in place?

A

To prevent cash flow problems

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7
Q

What does ROI stand for?

A

Return on investment

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8
Q

What does ROI measure?

A

Return on investment measures how efficient an investment is - it compares the return from a project to the amount of money that’s been invested

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9
Q

ROI formula

A

(ROI / Cost of investment) X 100

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10
Q

What are two internal factors that influence financial objectives?

A

The overall objectives of the business
- The status of the business

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11
Q

What are 5 external factors that influence financial objectives?

A

-The availability of finance
-Competitors
-The economy
-Shareholders
-Environmental and ethical influences

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12
Q

Explain the influence the economy has on financial objectives

A

In a period of economic boom, businesses can set ambitious profit targets. In a downturn, they have to set more restrained targets and they might set targets that minimise costs.

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13
Q

Percentage change in profit formula

A

(Current year’s profit - previous year’s profit) / previous year’s profit) X 100

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14
Q

What are the 3 types of profit?

A

-Gross profit
-Operating profit
-Profit for the year (net profit)

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15
Q

Gross profit formula

A

Gross profit = sales revenues - cost of sales

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16
Q

Operating profit formula

A

Operating profit = gross profit - operating expenses

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17
Q

Profit for the year formula

A

Profit for the year = operating profit - net finance costs - tax

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18
Q

Operating profit margin formula

A

(Operating profit / sales revenue) X 100

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19
Q

Net profit margin

A

(Net profit / sales revenue) X 100

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20
Q

gross profit margin

A

(Gross profit)
——————– X100
sales revenue

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21
Q

contribution per unit

A

selling price per unit - variable cost per unit

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22
Q

total contribution formula

A

-total revenue - TVC
-contribution per unit X num of units sold

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23
Q

Break even output formula

A

Fixed costs/contribution per unit

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24
Q

margin of safety formula

A

actual output - break even output

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25
Give examples of cash inflows
-Sales revenue -Payment from debtors (recievables) -Sale of assets -Owners’ capital invested -Sources of finance
26
Give examples of cash outflows
Purchasing stock Wages Paying debts Purchasing assets
27
main causes of cashflow problems
-low profits -allowing customers too much credit and too long to pay
28
improving cash flow short term
-cut costs -reduce current assets -increase current liabilities
29
improving cash flow long term
-increasing equity finance -increase long term liabilities -reduce net outflow on fixed assets
30
debt factoring pros/cons
used if the business sells a lot on credit, you have a lot of debtors so you sell these debtors to a factoring company. They will give you 90% of the value. Pros: -business can focus on selling rather than collecting debts -Receivables (amount owed by customers) are funded into cash quickly Cons: -customers may feel their relationship with the business has changed -quite a high cost
31
Bank Overdraft pros and cons
when a business withdraws more cash from a bank account than it holds. -short term finance -used by startup businesses -external finance pros: -quick and simple to organise -flexible -interest only paid on the amount borrowed under the family cons: -can be withdrawn at short notice -higher interest rates than a bank loan
32
Retained profit
when a business uses historical profits from previous years to invest -long term finance -internal finance -usually established business Pros: -flexibility -business owners in control -low cost -no control/shares given up -safe low risk approach cons: -may create conflict with shareholders -no expertise added -a drain on finance if loss-making
33
selling fixed assets
raising cash by selling assets -usually long term finance -internal finance -usually established businesses pros: -not a form of debt so no no interest paid -providing you can find a buyer its a quick form of cash cons: -only a finite amount of times -risk you cant fins a buyer or its not a fair price
33
new shares issues
when a limited company issues shares in exchange for a payment -long term finance -external finance -established businesses pros: -no interest -if PLC -> stock exchange - opportunity to raise finance cons: -Give up shares in the business -expected to pay dividends
34
bank loan
when a business borrows a sum of money and pays it back with interest over an agreed period of time. -long term finance -external finance pros: -no shares in the business need to be given up -interest rates are lower than overdrafts -greater certainty of funding cons: -harder to arrange -no flexibility -assets will be taken if you fail to repay
35
venture capital
a type of finance offered by V.C. fund to high risk high reward firms in exchange for a share of the business -long term finance -external finance pros: -makes expansion possible -no repayment -reduce personal risk -V.C have expertise cons: -given up share of the business -may lose control if more than 50% of share given up
36
Trade credit
when you buy raw materiel's or components from suppliers today but pay later. -short term finance -external finance pros: -simple to arrange and maintain -cheap form of short term finance -no control is given up cons: -risk of spoiling relationship with supplier if credit terms are not met -large fine if you pay late
37
What are the three types of budget?
income expenditure profit
38
Give 3 advantages of budgeting
-help achieve targets -control income and expenditure -assists managers to review their activities and make decisions -motivate staff -allocate resources
39
Give 3 drawbacks of budgets
-can cause resentment and rivalry if departments have to compete for money -restrictive -time-consuming to set and review the budget -costs-there will always be unexpected costs
40
What are the two methods used to set budgets?
Zero-based budgeting and historical budgeting
41
Define varience
Variance is the difference between actual figures and budgeted figures
42
Give 3 external influences that cause variance
-competitor behaviour -changes in the economy -the cost of raw materials
43
Give 3 internal influences that cause variance
-improvements in efficiency -overestimated/ underestimated budgets -changes in selling price
44
Possible Causes of Adverse Variances
• Unexpected events lead to unbudgeted costs • Over-spends by budget holders • Sales forecasts prove over-optimistic • Market conditions (e.g. competitor actions) mean demand is lower than budget
45
Possible Causes of Favourable Variances
• Stronger demand than expected = higher actual revenue • Selling prices increased higher than budget • Cautious sales and cost assumptions (e.g. cost contingencies) • Better than expected productivity or efficiency
46
Give 3 advantages of break-even analysis
-Easy to carry out -Quick way to find out break-even output and margin of safety -Forecasts how variations in sales will affect costs, revenue and profits
47
Give 3 disadvantages of break-even analysis
-Assumes that variable costs always rise steadily -The analysis is for only one product and the majority of businesses sell a whole portfolio of products -It only tells you how many units you need to sell and not how many you are actually going to sell
48
Key Benefits of Using Financial Objectives
-A focus for the entire business -Important measure of success of failure for the business -Reduce the risk of business failure -Provide transparency for shareholders about their investment -Help coordinate the different business functions -Key context for making investment decisions
49
Cost Minimisation definition
Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to the required level of quality
50
Key Benefits of Effective Cost Minimisation
-Lower unit costs (competitiveness) -Higher gross profit margin (%) -Higher operating profits -Improved cash flow -Higher return on investment
51
Possible Cash Flow Objectives
• Reduce borrowings to target level • Minimise interest costs • Reduce amounts held in inventories or owed by customers • Reduce seasonal swings in cash flows
52
Two Common Investment Objectives
-Level of Capital Expenditure Set at either an absolute amount (e.g. invest 5m per year) or as a percentage of revenues (e.g. 5% of revenues) -Return on Investment (ROCE) Usually set as a target % return, calculated by dividing operating profit by the amount of capital invested
53
Problems and Limitations of budgets
-Are only as good as the data being used -Can lead to inflexibility in decision-making -Need to be changed as circumstances change -Take time to complete and manage -Can result in short term decisions to keep within the budget
54
Favourable variances
• Actual figures are better than budgeted figure • E.g. costs lower than expected • E.g. revenue/profits higher than expected
55
Adverse variances
• Actual figure worse than budget figure • E.g. costs higher than expected • E.g. revenue/profits lower than expected
56
What is the Margin of Safety
Margin of Safety is the difference between: Actual Output (units) and Breakeven Output (units)
57
Profit equation
Profit = Margin of Safety (units) X Contribution per Unit (E)
58
How to Improve the Margin of Safety?
-Increasing Contribution per Unit • Raise selling prices • Reduce variable costs per unit -Lower the Breakeven Output • Lower fixed costs • Turn fixed costs into variable costs -Increase Actual Output • Sell more
59
Trade Receivables (Debtors)
Amounts owed to a business by customers
60
Trade Payables (Creditors)
Amounts owed by a business to suppliers & others
61
Receivables Days
The average length of time taken by customers to pay amounts owed
62
Payables Days
The average length of time taken by a business to pay amounts it owes
63
Receviable days equation
Receviables davs = Trade receivables ————————- × 365 Revenue sales)
64
Payable days
Payables Days = Trade payables ———————. × 365 Cost of sales

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