Unit 5 - Decision making to improve financial position
The value of setting financial objectives -
Financial objectives are goals / targets that relate to the business’s financial performance.
➔ Enables managers to judge the performance of the enterprise from when it was first
established
➔ Setting objectives for cash flow can help avoid collecting too much debts
➔ Many businesses (especially plcs) are judged based on the level of profits they achieve
➔ Enables managers to identify aspects of performance that are causing problems at the
earliest possible stage
➔ Can help motivate employees
Cash flow vs profit -
Profit is made within the business if the revenue is greater than the expenditures. Cash flow
relates to the timing of payments and receipts - it is important in the short term.
Profitability ≠ large sums of cash
- If a business has long credit days e.g. 60-90, it will mean the business does not receive
the money until then, they will have little cash in the short term → can become more of a
problem if the business pays its suppliers promptly, it will need this money to do so
- Businesses such as jewellers will have large amounts of expensive inventories and stocks
(customers to view the jewellery before making a choice)
- A business might have paid for assets e.g. property, with a large sum of cash, this would
cause short term liquidity problems
- Insolvency (unable to pay for its debts) = ceased trading
Different measurements of profits -
1. Gross profit = sales revenue - direct costs
- Gives a broad indication of the financial performance of the business without
taking into account other costs such as indirect costs / overhead costs
2. Operating profits = revenue - indirect costs
- Excludes any costs from activities that are unlikely to be repeated in future
financial years (costs from joint ventures / non-trading activities like
investments / interest on loans / taxations on profits)
3. Profit of the year
= Operating profit + Profit from other activities − Net finance costs − Tax
, Unit 5 - Decision making to improve financial position
Revenue, cost & profit objectives -
1. Revenue objectives
- Helps businesses to build a
customer base and establish
themselves within their
chosen market
- More widely used by
businesses whose aim is to
grow
- Can be based on a business
reducing its prices with the
expectations of making
additional sales → increasing
revenue (may be appropriate
for supermarket businesses
where demand for products
can be sensitive to prices e.g.
price elastic)
2. Cost objectives -
The value of setting financial objectives -
Financial objectives are goals / targets that relate to the business’s financial performance.
➔ Enables managers to judge the performance of the enterprise from when it was first
established
➔ Setting objectives for cash flow can help avoid collecting too much debts
➔ Many businesses (especially plcs) are judged based on the level of profits they achieve
➔ Enables managers to identify aspects of performance that are causing problems at the
earliest possible stage
➔ Can help motivate employees
Cash flow vs profit -
Profit is made within the business if the revenue is greater than the expenditures. Cash flow
relates to the timing of payments and receipts - it is important in the short term.
Profitability ≠ large sums of cash
- If a business has long credit days e.g. 60-90, it will mean the business does not receive
the money until then, they will have little cash in the short term → can become more of a
problem if the business pays its suppliers promptly, it will need this money to do so
- Businesses such as jewellers will have large amounts of expensive inventories and stocks
(customers to view the jewellery before making a choice)
- A business might have paid for assets e.g. property, with a large sum of cash, this would
cause short term liquidity problems
- Insolvency (unable to pay for its debts) = ceased trading
Different measurements of profits -
1. Gross profit = sales revenue - direct costs
- Gives a broad indication of the financial performance of the business without
taking into account other costs such as indirect costs / overhead costs
2. Operating profits = revenue - indirect costs
- Excludes any costs from activities that are unlikely to be repeated in future
financial years (costs from joint ventures / non-trading activities like
investments / interest on loans / taxations on profits)
3. Profit of the year
= Operating profit + Profit from other activities − Net finance costs − Tax
, Unit 5 - Decision making to improve financial position
Revenue, cost & profit objectives -
1. Revenue objectives
- Helps businesses to build a
customer base and establish
themselves within their
chosen market
- More widely used by
businesses whose aim is to
grow
- Can be based on a business
reducing its prices with the
expectations of making
additional sales → increasing
revenue (may be appropriate
for supermarket businesses
where demand for products
can be sensitive to prices e.g.
price elastic)
2. Cost objectives -
