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Description
Flashcards by Ashleigh-Jade Jones, updated more than 1 year ago
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Created by Ashleigh-Jade Jones
almost 7 years ago
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| Question | Answer |
| Financial Objective: | a goal or target to be pursued by the finance department -they must be SMART as they are objectives -they provide focus for other decision-making and effort -used to motivate staff -can be used to measure the success/failure of the department |
| Typical Financial Objectives: | -Revenue objectives -Cost objectives -Profit objectives -Cash-flow objectives -Investment/capital expenditure objectives -Return on investment objectives (ROCE) -Capital structure objectives -Satisfying shareholders objectives |
| Revenue Objectives: | (sales growth by value/volume and sales maximisation) by better promotion, changing prices (link to marketing) |
| Cost Objectives: | (cost minimisation) by reducing waste, fixed/variable costs etc. (link to operations) |
| Profit Objectives: | (profit growth/maximisation) by chargin higher prices, increasing sales or minimising costs |
| Cash-Flow Objectives: | by minimising outflows, improving inflows, improving liquidity etc. |
| Investment/Capital Expenditure Objectives: | (level of spending) through machinery or expansion/growth |
| Return on Investment Objectives: | (compares profit with the size of the business) -improve last years ROCE, better than average in industry, better than rivals *ROCE (%) = operating profit / capital employed) x 100 |
| Capital Structure Objectives: | (how a firm finances its overall operations/growth by usiong different sources of funds) Gearing: the percentage of capital invested into the firm that has come from loans *Gearing (%) = NCL / (NCL + TE) x 100 (above 50% is high, below 25% is low) |
| Cash Flow: | the total amount of cash flowing into the business (inflows), minus cash leaving the business (outflows) over a period of time |
| Cash Inflows: | cash flowing into the business e.g. from customers sales, loans taken out, rent charged, selling assets |
| Cash Outflows: | cash flowing out of the business e.g. paying for supplies, purchase of other goods/equipment, repaying loans and interest |
| Difference Between Cash and Profit: | cash is the actual money held that the business can use whereas profit is the final result at the end of a financial period *Profit = revenue - costs |
| Reasons a Business Appears Profitable but Has Poor Cash Flow/Liquidity: | -makes sales to customers of credit (sale counts immediately as revenue but becomes a cash inflow when it is actually received) -payments for goods from suppliers (show as a cost immediately but wont be an outflow until it is paid for) -stock (an asset for the business but means cash is tied up) -payment for non-current assets (will be an outflow but not show as a cost on the income statement) |
| Cash and Profit: | a firm must make profit to be viable but must have good cash flow to be able to pay its debts and avoid being forced into bankruptcy or liquidation. Cash flow may be important in the short term if times are hard but ultimately, long term profit is important |
| Liquidity: | a firms ability to cover their current liabilities (debts) with their current assets |
| Influences On Financial Objective Decisions: (Internal/External) | Internal: -managers attitudes to risk and finance -owners views -human resource issues e.g. staff skills -nature of product -legal structure of business -operational issues (stock levels needed, investment needed etc.) -resources available External: -state of the economy -inflation/interest rates -political factors -technology performance -suppliers -customers needs/expectations |
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