UNIT 5 Flashcards
(55 cards)
why are financial objectives important
- give clear targets to the business as numbers are easy to understand
- performance measurement
- helps with planning and budgeting
- supports long term survival
4 types of profit
- revenue
- gross profit
- operating profit
- net profit
name 3 cash flow objectives
- specific, reserved cash
- shortening payments periods for customers
- extending cash outflow to suppliers
name 3 investment and return objectives
- a target for capital investment, aligned with growth target
- reducing capital investment to reduce debt
- calculate return on investment
whats ROCE
return on capital employed
- amount of profit made compared to how much has been put in
calculate return on capital employed
operating profit/ capital employed
all times 100
how to calculate capital employed
total equity+ non current liabilities
whats the ideal capital employed
20-30 percent
whats capital structure
the way business finances operations using a mix of debt ( borrowed money eg: loans) and equity ( money from shareholders)
what does too much share capital lead to
more dividends paid out
why is relying on loan capital an issue for business’
there may be a risk of interest increase, which suggests the business’ may not be able to pay this as the rely too much, and may question their survival
name 3 internal influences on financial objectives
- help to meet corporate objectives
- type of product
- other functional objectives eg: operations objective of being more efficient will have a knock on effect
whats a budget
a financial plan for the future
2 purposes of budgeting
- control/ monitoring
- motivation
what are the 2 types of budget
revenue vs expenditure
what are types of budget usually based on
historical data
whats a zero based budget
requires all expenditures to be justified, to ensure value for money
strength and 3 weakness of zero based budget
- minimise cost
- time consuming
- past data may not be best to indicate future
- external factors can affect eg: interest rates
whats a variance analysis
a difference between actual and budget figures
whats the difference between a favourable and adverse variance
favourable is where costs are lower than expected
adverse is where costs are higher, therefore revue lower
whats a cash flow forecast
a prediction of cash coming in and out of the business, usually in a table format
3 reasons why a cash flow is important
- overview of expenses
- help a business avoid insolvency ( not being able to pay off debt ) and bankruptcy
- identifies negative cash flow
whats a net cash flow
total inflow- total outflow
how to we figure out opening balance on a cash flow forecast
its the same as months before closing balance
