Unit 5
- Created by: Layla.thomas16
- Created on: 11-11-19 17:30
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- Unit 5
- Setting financial objectives
- A goal or objective to be pursued by the finance department
- Financial aims- broad goals for the finance department
- Financial objectives- SMART targets for the apartment to achieve their aims
- Financial strategies- long/medium-term plans, devised at a senior management level;designed to achieve objectives
- Financial tactics- short-term financial measures adopted to meet needs of a short-term threat or opportunity
- Financial strategies- long/medium-term plans, devised at a senior management level;designed to achieve objectives
- Financial objectives- SMART targets for the apartment to achieve their aims
- Financial aims- broad goals for the finance department
- Cash flow- the total amount of cash flowing into the business (inflows) minus all the cash leaving (outflows) of a business over a period of time
- Cash inflow- receipt of cash into the business such as those from customers from sales, loans taken out, selling assets
- Cash outflow- payments of cash leaving the business such as for purchasing raw materials from suppliers, purchasing other goods or equipment, repaying loans and interest
- Cash inflow- receipt of cash into the business such as those from customers from sales, loans taken out, selling assets
- Operating profit is revenue- (variable and fixed costs)
- Net cash flow is inflows - outflows
- Cash is the actual money held within a business in the short-term that is able to use to pay debts
- Profit is the final result at the end of a financial period where the revenue is greater than the total costs
- A business may look profitable on its accounts but may constantly struggle with low cash levels
- Profit is the final result at the end of a financial period where the revenue is greater than the total costs
- Cash is the actual money held within a business in the short-term that is able to use to pay debts
- Net cash flow is inflows - outflows
- Can't pay debts = insolvent
- Appear profitable but have poor cash flow and liquidity- sales on credit, payment for goods from suppliers, purchased stock has cash tied up in it, non-current assets
- Non-current assets are counted as an asset on the balance sheet not a cost to impact profit
- Depreciation is counted as a cost but not a cash outflow
- Non-current assets are counted as an asset on the balance sheet not a cost to impact profit
- Appear profitable but have poor cash flow and liquidity- sales on credit, payment for goods from suppliers, purchased stock has cash tied up in it, non-current assets
- Cash flow objectives- maintaining a minimum closing monthly cash balance, improving inflows, minimising outflows, reducing reliance on overdraft to minimise high interest payments, improving liquidity-hold less stock
- ROCE- value of resources used by a business it is an excellent guide to a firms size. Operating profit/capital employed x 100
- Gearing= the % of capital invested into the firm that has come from loans
- Internal factors- managers attitudes, resources available, type of product
- External factors- state of the economy, inflation and interest rates, suppliers
- A goal or objective to be pursued by the finance department
- Analysing financial performance; break even analysis
- Contribution per unit = selling price - variable costs
- Break-even = fixed costs / contribution per unit
- BE Chart
- How to change BE point, increase/decrease fixed costs to generate enough total contribution to cover the costs or Increase/decrease sales so contribution per unit compares to price and will need to be sold to cover fixed costs
- BE Chart
- Benefits- simple and quick good for small/inexperienced businesses, shows when a business will start to make profit, helps plan level of sales
- Limitations- ASSUMES selling price says the same, fixed costs stay the same, variable costs vary in direct proportion to output, all unites are sold, short-term and based on forecasted data can be unreliable
- Analysing financial performance; budgeting and variance
- Budgets- agreed financial plans with targets set for income, expenditure, and profit over a given period of time (usually a year) - responsible is a budget holder
- Income, expenditure and profit budget
- Profit budget = income budget - expenditure budget
- Income, expenditure and profit budget
- Methods- according to competitors, objectives, % sale revenue, last year
- Zero-budgeting = must justify why any expenditure is necessary
- + Encourages thorough planning, helps identify change in needs, helps save money
- - Time consuming, managers better at negotiating may get more money
- Reasons to budget- helps gain investment/finance, monitors and reviews, helps establish priorities, improves staff performance, assigns responsibiity
- Problems of budgeting- imposed budgets by higher up staff may not know, research problems and accuracy, unforeseen changes, time taken
- Zero-budgeting = must justify why any expenditure is necessary
- Variance= budget figure - actual figure
- Favourable- costs lower or revenue higher
- Adverse- costs are higher or revenue is lower
- Budgets- agreed financial plans with targets set for income, expenditure, and profit over a given period of time (usually a year) - responsible is a budget holder
- Analysing financial performance; cash flow
- Factors effecting cash flow- amount of cash invested into the firm and held at the start of trading, length of time taken to to produce the product, amount of stock held, goods sold on credit, amount of credit given by suppliers, seasonality
- Liquidity- firms ability to pay off short-term debts
- Cash flow forecast- prediction
- Causes of inaccuracies-changes in trends/tastes,economic changes impacting consumer spending, inaccurate market research, rivals, changes in cost, customers/suppliers failing
- Reasons to use- identify potential problems, guide the firm, make sure sufficient cash available, evidence for financial assistance i.e. loans
- Cash flow statement- based on definite
- Analysing financial performance; improving profitability
- Efficiency of a business at generating profit in relation to the size of the bsuiness
- Sales revenue and capital employed
- Profit margin compares a businesses profit to its sales volume and expresses as a %
- Gross profit- made one the firms direct costs are paid
- Operating profit- made directly from trading
- Profit for the year- made from all activities once all costs and income of the business has been paid and revenue been received from the firms main and additional activities
- PFYM- PFTY/sales x100
- The higher the margin the more efficient a firm is at controlling costs
- OPM- operating profit/ sales x100
- Profit for the year- made from all activities once all costs and income of the business has been paid and revenue been received from the firms main and additional activities
- GPM- gross profit/sales x100
- Operating profit- made directly from trading
- Gross profit- made one the firms direct costs are paid
- Efficiency of a business at generating profit in relation to the size of the bsuiness
- Sources of finance
- Internal-inside the business i.e. retained profit, sale of assets
- External- outside the business i.e. loans, debt factoring, venture capital
- Short-term- repayments within 12 months i.e. stock, short-term debts such as bills
- Long-term - repayments usually after 3 years i.e., machinery, vehicles
- Short-term- repayments within 12 months i.e. stock, short-term debts such as bills
- External- outside the business i.e. loans, debt factoring, venture capital
- Revenue expenditure is day to day expenses and capital expenditure is spending on assets that will be used for longer than a year
- Issues= amount of finance required, profit levels, risk, owners views, time, structure of business, current debts
- Internal-inside the business i.e. retained profit, sale of assets
- Improving cash flow and profits; improving profits
- Can increase prices, reduce costs of production, increase sales volume, investment in non-currentbassets, new product development,modified marketing mix, HR strategies
- Increasing prices should increase profit margin if product is necessity and therefore price inelastic
- Improve productive efficiency, introduce technology to improve efficiency, increase capacity utilisation, cease production of unprofitable products or services
- Technology decrease unit costs by increasing output and improving efficiency, better products may attract higher sales
- Can increase prices, reduce costs of production, increase sales volume, investment in non-currentbassets, new product development,modified marketing mix, HR strategies
- Setting financial objectives
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