Business 5
Financial management
Financial objectives
—> Setting financial objectives
– Return on investment
-> measure of hoe much net profit a capital expenditure investment generates relative to the amount
originally invested
ROI = profit from an investment / capital invested x 100
-> allows for effective allocation of capital expenditure
-> achieving a good ROI on capital expenditure investments signals that management can make
good choices, supports share price, attracts investors and makes lenders more willing to grant loans
Revenue - income a business earns from selling its goods or services
Reasons for setting revenue objectives
– Signals ambition to investors: clear targets attract funding because investors can se how fast
the firm intends to grow
– Determines marketing and sales budgets
– Aligns team efforts
Difficulties
– Demand uncertainty
– Competitive reactions
– Cost inflation and supply constraints
Cost objectives - clear target that a business sets for how much it wants to spend over a period
Why businesses sector cost objectives
– Protect profit margins
– Offer lower prices than rivals
– Cash for growth or innovation
– Stay resilient in tough times
Difficulties
– Volatile supply prices
– Over aggressive cost reduction
– External shocks and regulatory change
Profit objectives - target for the amount of profit a business wants to earn over a period
, Why businesses set profit objectives
– Build investor confidence
– Fund future investment
– Promote efficiency
– Guide dividend and bonus decisions
Difficulties
– Volatile raw material costs
– Intense price competition
– Currency swings
– Regulations and tariffs
Cash flow objectives - movement of money in and out of a business over period of time
Why businesses set cash flow objectives
– Fund investment without extra borrowing
– Strengthen credit rating
– Spot funding gaps early
Difficulties
– Seasonal working capital problems
– Large capital expenditure
– Rapid changes in market conditions
– Exchange rate stocks
—> Cash, profit and types of profit
Profit - the difference between revenue generated and total business costs during specific time
period
Gross profit = revenue - direct costs
Operating profit = gross profit - indirect costs
Profit for the year = operating profit - (net interest + tax)
Cash - taking into account the full range of money flowing in and out of a business
-> used to cover regular operating expenses
Financial performance
—> Budgeting
Using budgets to guide decisions
– Planning and resource allocation
Financial management
Financial objectives
—> Setting financial objectives
– Return on investment
-> measure of hoe much net profit a capital expenditure investment generates relative to the amount
originally invested
ROI = profit from an investment / capital invested x 100
-> allows for effective allocation of capital expenditure
-> achieving a good ROI on capital expenditure investments signals that management can make
good choices, supports share price, attracts investors and makes lenders more willing to grant loans
Revenue - income a business earns from selling its goods or services
Reasons for setting revenue objectives
– Signals ambition to investors: clear targets attract funding because investors can se how fast
the firm intends to grow
– Determines marketing and sales budgets
– Aligns team efforts
Difficulties
– Demand uncertainty
– Competitive reactions
– Cost inflation and supply constraints
Cost objectives - clear target that a business sets for how much it wants to spend over a period
Why businesses sector cost objectives
– Protect profit margins
– Offer lower prices than rivals
– Cash for growth or innovation
– Stay resilient in tough times
Difficulties
– Volatile supply prices
– Over aggressive cost reduction
– External shocks and regulatory change
Profit objectives - target for the amount of profit a business wants to earn over a period
, Why businesses set profit objectives
– Build investor confidence
– Fund future investment
– Promote efficiency
– Guide dividend and bonus decisions
Difficulties
– Volatile raw material costs
– Intense price competition
– Currency swings
– Regulations and tariffs
Cash flow objectives - movement of money in and out of a business over period of time
Why businesses set cash flow objectives
– Fund investment without extra borrowing
– Strengthen credit rating
– Spot funding gaps early
Difficulties
– Seasonal working capital problems
– Large capital expenditure
– Rapid changes in market conditions
– Exchange rate stocks
—> Cash, profit and types of profit
Profit - the difference between revenue generated and total business costs during specific time
period
Gross profit = revenue - direct costs
Operating profit = gross profit - indirect costs
Profit for the year = operating profit - (net interest + tax)
Cash - taking into account the full range of money flowing in and out of a business
-> used to cover regular operating expenses
Financial performance
—> Budgeting
Using budgets to guide decisions
– Planning and resource allocation
