5.1 Financial Objectives (AQA A Level Business): Flashcards
Exam code: 7132
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How do financial decisions affect other business functions?
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How do financial decisions affect other business functions?
They have a direct impact — finance provides the funding marketing, operations and HR need, and those functions influence financial planning.
Define a financial objective.
A financial objective is a clear, measurable target for a firm's financial performance.
What is the formula for return on investment (ROI)?
ROI = (profit from an investment ÷ capital invested) × 100.
An investment of £340,000 generates £56,000 profit a year. What is the ROI?
(£56,000 ÷ £340,000) × 100 = 16.47%.
Why do businesses set revenue objectives?
To signal ambition to investors, set marketing/sales budgets, and align team efforts around one metric.
Give one difficulty in setting revenue objectives.
Demand uncertainty, competitive reactions, and cost inflation / supply constraints.
Define a cost objective.
A cost objective is a clear target for how much a business wants (or is allowed) to spend over a period.
Give one way a profit objective can be expressed.
An absolute amount, percentage growth, a profit margin, or profit per unit.
Define cash flow.
Cash flow is the movement of money into and out of a business over a period of time.
What is a cash flow objective focused on?
Liquidity — whether the business has enough ready money to pay suppliers, wages and lenders when due.
Why do firms set cash flow objectives?
To fund investment without extra borrowing, strengthen their credit rating, and spot funding gaps early.
Careful cost control allows a business to competitors' prices and still make money.
Careful cost control allows a business to undercut competitors' prices and still make money.
ROI measures how much net profit an investment generates relative to the amount originally .
ROI measures how much net profit an investment generates relative to the amount originally invested.
True or False?
A high profit objective guarantees a business will have enough cash.
False.
Profit and cash differ — a business can be profitable but lack cash if customers haven't paid yet.
Give one difficulty in meeting cash flow objectives.
Seasonal working-capital problems, large capital expenditure, rapid market changes, and exchange-rate shocks.
True or False?
Setting cost objectives too aggressively can harm quality or customer service.
True.
Over-aggressive cost reduction can undermine quality or service and hurt long-term performance.
What is the difference between cash and profit?
Profit is the difference between revenue and total costs over a period; cash is the money flowing in and out of the business.
Why might a profitable business still lack cash?
Some customers may not have paid yet, so profit is earned but the cash hasn't arrived.
Define insolvency.
Insolvency is when a business cannot pay its suppliers, employees and operating expenses due to a lack of cash.
What is cash used for in a business?
Covering regular operating expenses (wages, suppliers, rent) and unexpected expenses like broken equipment.
What is the formula for gross profit?
Gross profit = revenue − direct costs.
What is the formula for operating profit?
Operating profit = gross profit − indirect costs.
How is profit for the year calculated?
Profit for the year = operating profit − (net interest + tax).
Gross profit is the difference between revenue and the costs directly related to .
Gross profit is the difference between revenue and the costs directly related to production.
True or False?
A business that is profitable can never become insolvent.
False.
A profitable business can still fail without enough cash (e.g. Joules).
True or False?
Operating profit is calculated before indirect costs are deducted.
False.
Operating profit = gross profit − indirect costs — indirect costs ARE deducted.
Profit for the year is operating profit minus net interest and .
Profit for the year is operating profit minus net interest and tax.
What does operating profit show?
The difference between gross profit and the indirect expenses involved in operating the business.
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