Setting Financial Objectives

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  • Created by: LettieKay
  • Created on: 13-03-17 10:32
What does Financial Objectives mean?
The specific, focused aims or goals of the finance and accounting function or department within an organisation.
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What are the different types of financial objectives? (8 Different Kinds)
1) Revenue Objectives 2) Cost Objectives 3) Profit Objectives 4) Objectives for investment levels 5) Cash Flow Objectives 6) Capital Structure objectives 7) Return on investment Objectives 8) Objectives as debts as a proportion of long-term funding.
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Benefits of Financial Objectives
1) Act as a focus 2) Can provide a measure of success 3) improves co-ordination 4) Improve Efficiency 5) Allow shareholders to see whether the business is worth investment 6) confirm financial viability for outside businesses.
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Difficulties of Financial Objectives
1) Can be hard to set realistic objectives 2) External Changes 3) success may be hard to define 4) Actual performance may depend on whole of business 5) may confict with other objectives.
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Formula for Return on Investment is...
Return on Investment (%) = Return on Investment / Cost of Investment x 100
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Investment is...
In the context of a business, investment describes items that are purchased by firms because they help them to produce goods and services. These items are often described as capital goods and include items such as machinery, vehicles and offices.
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Debts are...
Money owed by an organisation or individual. For Example, money borrowed by the business from a bank is a debt which is owed to the bank, and will need to paid back at the set time.
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Long-term Funding
Money provided to a business which does not require repayment within a year.
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Debt as a proportion of long-term funding is...
Debts as a proportion of long term funding = debts / long-term funding x 100
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Debts like Bank loans create 2 potential problems...
Interest payments on the debts must be paid regularly and the full amount of the loan has to be paid by an agreed date.
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What does the debt to long-term funding ratio show??
It can show the financial health of a business.
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What is profit?
The difference between the total revenue of a business and its total costs. Profit = total revenue - total costs.
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What is Cash Flow?
The amount of money flowing into and out of a business over a period of time.
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Profitable firms may be short of cash because of...
1) The Firm has built up its inventory levels 2) The Firms sales are on credit 3) The firm has used its profits to pay dividends to its shareholders 4) Purchased fixed assets recently, large amounts of cash may have gone towards it e.g. A new factory
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What is Liquidity?
The ability to convert an asset into cash without loss or delay.
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Gross Profit is
Revenue - Cost of Sales = Revenue
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Gross Profit shows
GP shows how well a business is converting raw materials into finished products. Overheads aren't included in the figure.
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Operating Profit is ...
Operating Profit is profit made from training. It is Gross Profit - Administrative expenses.
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Analysts consider 'Operating Profit' the best measure of a company's performance because...
It focuses on the profit / loss made from trading and ignores the exceptional figures that may distort the figures.
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Profit for year is...
This is the the profit available to the owners (shareholders in a limited company). It includes all revenue, including 'non trading revenue', sales of assets, all expenditure including finance costs and taxation.
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Profit is useful for shareholders because....
It shows how much they profit from becoming a shareholder.
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Revenue Objectives
Tend to take 3 forms - Sales Maximization, Targeting a specific increase in sales revenue, and exceeding the sales of a competitor.
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Revenue Objectives mainly rely on the marketing mix because...
Lowering prices will invariably lead to an increase in the quantity demanded, or new promotions can also achieve this.
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Cost Minimization means the business can benefit in two ways...
They can keep their prices the same and benefit from higher profits, or they can use their cost reduction to reduce the selling price of its finished product and so attract more customers.
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Examples of cost minimisation objectives...
Achieving a certain cost reduction, reducing wage costs per unit, lowering wastage, relocating a business to a low cost site, reducing the cost per 1000 of advertising and promotion, improving efficiency in production, e.g lowering variable costs
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Profit Objectives =
Profit Maximisation, Targeting a specific increase in profit, exceeding the profit of close competitors
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Cash Flow Objectives
Maintaining a min closing monthly cash balance, Reducing bank overdraft, create an even spread of sales revenue, spread costs evenly, achieve a certain level of non-cash items, raise levels of cash, set contingency fund levels.
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Depreciation is...
The fall in value of an asset over time, reflecting the wear and tear of the asset as it becomes older, the reduction in its economic use or its obsolescence.
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Obsolescence is...
When an asset is still functioning but is no longer considered useful because it is out of date.
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Two types of investment are...
Replacement Capital / Investment = investment intended to replace assets that have worn out. New Investment = Investment on Capital Goods that enables a business to increase its capacity to produce.
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Factors influencing investment decisions and objectives...
Expected Return on investment, Interest Rates, Expected Demand, Levels of technological change, Availability of finance, Business confidence, Attitude to risk, Level of spare capacity, Nature of production, competitors actions.
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Capital Structure Objectives
Debt Capital, Debentures, and Equity Capital
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A common capital structure objective is...
to set a target for the debt to equity ratio.
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External Factors on financial Objectives are...
PESTLE - Political, Economic, Social, Technological, Legal, Environmental as well as Market Factors, Competitors Actions and Suppliers.
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Political Factors influence Finance because...
Although finance usually impacts shareholders, this means greater openness for all stakeholder groups.
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Economic Factors influence Finance because...
If the economy is in recession, customers will buy fewer luxury goods, so lower sales and profit targets need to be set.
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Social Factors influence finance because
Businesses must adjust to suit society e.g. internet shopping
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Technological Change influence Finance because
It can lead to improvements in communications.
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Legal Factors influence finance because...
changes in law can lead to modified financial objectives.
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Environmental Factors influence finance because...
They may need to purchase eco friendly supplies and raw materials often costing more.
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Market Factors affect finance because
The demand for a product goes through cycles of expansion and decline, closely related to the life-cycle of a product.
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Competitors action and performance affect finance because...
When there is little competition, you can charge higher prices in order to achieve high levels of profit.
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Suppliers can influence finance because...
If they charge more, their profits will be less.
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Internal Influences on business objectives are
Business Objectives, Finance, HR, Operational Factors, Available Resources and Nature of the Product.
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Other cards in this set

Card 2

Front

1) Revenue Objectives 2) Cost Objectives 3) Profit Objectives 4) Objectives for investment levels 5) Cash Flow Objectives 6) Capital Structure objectives 7) Return on investment Objectives 8) Objectives as debts as a proportion of long-term funding.

Back

What are the different types of financial objectives? (8 Different Kinds)

Card 3

Front

1) Act as a focus 2) Can provide a measure of success 3) improves co-ordination 4) Improve Efficiency 5) Allow shareholders to see whether the business is worth investment 6) confirm financial viability for outside businesses.

Back

Preview of the back of card 3

Card 4

Front

1) Can be hard to set realistic objectives 2) External Changes 3) success may be hard to define 4) Actual performance may depend on whole of business 5) may confict with other objectives.

Back

Preview of the back of card 4

Card 5

Front

Return on Investment (%) = Return on Investment / Cost of Investment x 100

Back

Preview of the back of card 5
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