Decision making to improve financial performance
What is a financial objective?
A specific goal or target relating to the financial performance, resources and structure of a business.
Key benefits of using financial objectives:
- A focus for the entire business
- Important measures of success or failure for the business
- Reduce the risk of business failure
- Provide transparency for shareholders about their investment
- Help coordinate the different business functions
- Key context for making investment decisions
Profit and cashflow:
- Profit- the difference between total revenues and total costs over a period- looked at yearly
- Cashflow- the difference between total cash inflows and total cash outflows over a period-
looked at monthly
Profit = sales – total costs
Cashflow = cash inflows – cash outflows
Gross profit = revenue – cost of sales
Operating profit = gross profit – expenses
Profit for the year = operating profit – taxation
Cost minimisation objectives:
Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to
the required level of quality
Key benefits of effective cost minimisation:
- Lower unit costs
- Higher gross profit margin
- Higher operating profit
- Improved cash flow
- Higher return on investment
Two common investment objectives:
Return on investment-
A measure of the efficiency of an investment, used to compare the financial returns of alternative
investments
Return on investment = (return on investment/ cost of investment) x 100
Level of capital expenditure-
The capital of a business represents the finance provided to it to enable it to operate over the long-
term.
What is a financial objective?
A specific goal or target relating to the financial performance, resources and structure of a business.
Key benefits of using financial objectives:
- A focus for the entire business
- Important measures of success or failure for the business
- Reduce the risk of business failure
- Provide transparency for shareholders about their investment
- Help coordinate the different business functions
- Key context for making investment decisions
Profit and cashflow:
- Profit- the difference between total revenues and total costs over a period- looked at yearly
- Cashflow- the difference between total cash inflows and total cash outflows over a period-
looked at monthly
Profit = sales – total costs
Cashflow = cash inflows – cash outflows
Gross profit = revenue – cost of sales
Operating profit = gross profit – expenses
Profit for the year = operating profit – taxation
Cost minimisation objectives:
Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to
the required level of quality
Key benefits of effective cost minimisation:
- Lower unit costs
- Higher gross profit margin
- Higher operating profit
- Improved cash flow
- Higher return on investment
Two common investment objectives:
Return on investment-
A measure of the efficiency of an investment, used to compare the financial returns of alternative
investments
Return on investment = (return on investment/ cost of investment) x 100
Level of capital expenditure-
The capital of a business represents the finance provided to it to enable it to operate over the long-
term.
