The specific, focused aims or goals of the finance and accounting function or department within an organisation.
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State types of financial objectives
cost, investment, cash flow, return on investment, revenue, profit, objectives relating to debts as a proportion of long term funding.
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Benefits of setting financial objectives
Act as a focus for decision making, provide a yardstick to measure success+failure, improve co-ordination, improve efficiency, allow shareholders to assess their investment choice.
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Difficulties of setting financial objectives
Can be hard to set realistic objectives, external changes may be beyond the firms control, certain objectives may be hard to measure, some financial objectives may conflict with other objectives.
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Define return on investment and its equation
A measure of the efficiency of an investment in financial terms, used to compete the financial returns of alternative investments. Net profit / cost of investment X 100.
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Define long-term funding, debts and the equation of debts as a proportion of long-term funding
LTF-Money providing to a business which does not require repayment within a year. D-Money owed by an individual or organisation to another. Debts / Long-term funding X 100.
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Define net profit and the equation for net profit margin
NP- What is left after all costs have been taken away from sales revenue. Net profit / Revenue X 100.
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Define liquidation
It occurs when a company is insolvent, meaning that it cannot pay its obligations as and when they come due.
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Define gross profit and its equation
The profit a company makes after deducting the costs associate with making and selling its product. Shows how efficiently a business is converting raw materials into finished products. Revenue - Cost of sales.
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Define operating profit and its equation
Profit from trading. Focuses on the profit (or loss) made from trading. Gross profit - Administrative expenses.
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Define profit for year
Profit available to the owners. It includes all revenue, including 'non-trading' revenue, such as sales of assets, and all expenditure, including finance costs and taxation. Its usually a measure for shareholders (shows how they benefit).
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Define 3 major revenue objectives
Sales maximisation, targeting a specific increase in sales revenue, and exceeding the sale of a competitor.
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Define a major cost objective
Cost minimisation (achieving the lowest possible unit cost). It can either keep its price the same+benefit from a higher profit margin. OR Reduce costs to reduce selling price to attack more customers.
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Define a major profit objective
Profit maximisation through gross profit, operating profit and profit for a year.
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Define two major cash flow objective
Maintaining a minimum closing monthly cash balance or spreading costs more evenly.
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Define depreciation and obsolescence
Depreciation - the fall in value of an asset overtime. Obsolescence - when an asset is still function but no longer considered useful because it is out of date.
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State two types of investment that can be recognised
Replacement capital/investment - investment intended to replace assets that have depreciated. New investment - Expenditure on new capital goods that enable a business to increase its capacity to produce.
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What factors influence investment decisions and objectives?
Expected return on investment, expected demand, interest rates (rise in interest rates increases the cost of borrowing money), levels of technological change, attitude to risk, competitors actions, availability of finance.
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What are debt capital, debentures, equity capital
Debt capital - Consists of borrowing funds. These funds are likely to be bank loans. Debentures - Provides funding to a business in return for regular fixed interest payments+agreed repayment date. Equity Capital - Provided by shareholders.
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What are external influences on financial objectives and decisions
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