Financial Objectives
This is what a financial objective is.
What is a financial goal that a business wants to achieve? A business usually has specific targets in mind, and a specific period of time to achieve them in.
Write the formula for measuring the percentage change in profit.
What is
Percentage Change in Profit =
(Current year's profit - Previous year's profit)/ (Previous years profit ) x 100
Define budget and list the three different types.
A budget is a financial plan for the future. It forecasts future earnings and future spending.
1. Income budgets
2. Expenditure budgets
3. Profit budgets
Venture Capital and Crowdsourcing are sources of this type of finance.
What is external finance?
Explain what balance sheets show.
Balance sheets are a snapshot of a firm's finances at a fixed point in time.
They show the value of the business' assets, its liabilities, the value of the capital, and the source of the capital. Where the money comes from and what's being done with it.
Define Cash Flow and explain if it is important in the short-term or long-term.
Cash Flow is the money that flows into and out of a business over a period of time, calculated at the exact moment it enters or leaves the bank account or till.
It is more important in the short term because businesses need money to survive.
Describe 3 methods that business can use to increase their profits.
What are increasing prices, reducing prices to increase demand, reducing costs of production, advertising, and improving the quality of a product?
Describe the differences between Historical Budgets and Zero-based budgets.
Historical budgets are based on last year's budget. These are quick and simple.
Zero-based budgets start from zero and have to get approval to spend money on activities. These take much longer to complete. It is more accurate.
Define internal finance and explain how internal finance can be raised.
Internal finance comes from within the business. It can be raised by putting profits back into the business, or selling assets.
Rationalization is when managers reorganize to make businesses more efficient.
Explain liabilities and list some examples
A liability is a debt owed by a business. Examples include overdrafts, taxes, payables, and dividends.
Write the formula for Return on Investment (ROI).
What is
Return on Investment (%) = (Return on Investment/Cost of Investment) x 100?
Define profitability.
Profitability: the amount of profit relative to revenue or investment
Define Variance and describe the two different types.
Variance is the difference between Actual figures and Budgeted figures. A variance means that the business is performing better or worse than expected.
Favorable variance: increased profit
Adverse variance: reduced profits
Describe the two external sources that are suitable as Short-term finance.
Overdrafts: when a bank lets a business have a negative amount of money in their bank account
Debt-factoring: when banks take unpaid invoices off the hands of the business and give them an instant cash payment
Explain what income statements show and what they can be used for.
Income statements show revenue and expenses. These figures assess a company's financial performance.
Give two examples of both Internal and External factors that influence Financial Objectives.
Internal: The overall objective of the business, the status of the business, and other areas of the business.
External: The availability of finance, competitors, the economy, shareholders, and environmental/ethical influences.
List and explain the three different methods of reporting profit.
Gross Profit = sales revenue - cost of sales
Operating Profit = Sales revenue - cost of sales -operating expenses
Profit for the year = operating profit + other profit - net finance costs - tax
List 3 benefits and 3 drawbacks of budgeting.
Benefits: helps achieve targets, controls income and expenditure, helps managers review and make decisions, helps prioritize, allows departments to coordinate spending, persuades investors the business will be successful
Drawbacks: can cause resentment, can be restrictive, is time-consuming, inflation is difficult to predict, may be inaccurate
List two advantages and two disadvantages of bank loans.
Advantages: you are guaranteed the money for the duration of the loan, you only have to pay back the loan and interest, interest charges are typically lower than overdraft charges
Disadvantages: difficult to arrange, keeping up with the repayments can be difficult, may have to pay a charge if the business wants to pay the loan back early
List the two different ways that businesses can choose to use their profits.
1. Pay dividends to shareholders
2. Keep the profit in the business as retained profit
Explain the reasons why companies set cost, revenue, and profit objectives.
Revenue objectives are set to increase the value or volume of sales. Cost objectives are set to minimize costs. Profit objectives set a target for profit or a percentage increase from the previous year.
Write the formulas for calculating gross profit margins, operating profit margins, and profit for the year margins.
Gross Profit Margin = (gross profit)/(sales revenue)x100
Operating Profit Margin = (operating profit)/(sales revenue)x100
Profit for the year margin = (Profit for the year)/(sales revenue) x100
List two Internal factors and two External factors that cause Variance.
Internal Factors: Competitor behavior and changing fashions, Changes in the economy, and the cost of raw materials.
External Factors: Improving efficiency, overestimating money saved by streamlining, underestimating the cost of making changes, and changing the selling price.
Explain why businesses need a source of finance and describe the difference between internal and external finance. Also, describe the difference between short-term and long-term finance.
1. Businesses need finance to buy fixed assests, like machinery and offices. It is needed to pay day-to-day costs.
2. Internal is money that comes from within the business, while external finance comes from sources outside the business.
3. short-term: repaid within one year, temporary shortages of cash.
long-term: repaid within 3 years or more, for long-term investment
Explain current assets and non-current assets. List examples of each.
Current Assets: assets that the business is likely to exchange for cash within the accounting year. Ex: receivables, inventories (stock)
Non-current assets are assets that the business will keep for more than a year. These assets often lose value over time. Ex: property, land, desks, computers