Setting financial objectives

• What does ROI stand for?

  Return on Investment
• What is the purpose of ROI?

  To evaluate investment efficiency or profitability
• How does ROI measure returns?

  By comparing return to investment cost
• What are key factors influencing ROI?

  Initial investment, maintenance costs, cash flow
• How is ROI calculated?

  Benefit divided by cost of investment
• How is ROI expressed?

  As a percentage or a ratio
• What are the key takeaways about ROI?

  • ROI evaluates investment performance.
  • Calculated by net profit divided by initial cost.
  • Allows comparisons across different investments.
  • Does not consider holding period or opportunity costs.
  • Should be compared to other investment opportunities.
• Why might ROI miss important information?

  It does not account for holding period
• When should ROI be compared?

  Relative to other available opportunities
• What is a financial objective?

  A specific goal related to financial performance
• What are the key benefits of setting financial objectives?

  • Provides focus for the business
  • Measures success or failure
  • Reduces risk of business failure
  • Coordinates different business functions
  • Aids in investment decisions
  • Indicates management priorities to stakeholders
• What is a common type of financial objective related to revenue?

  Revenue growth
• What are some common revenue objectives businesses set?

  Revenue growth, sales maximisation, market share
• What is a common cost objective for businesses?

  Cost minimisation
• How can cost objectives relate to efficiency measures?

  They can link to unit costs and productivity
• What do most businesses aim to achieve with profit objectives?

  Maximise their profits
• What are different types of profit objectives?

  Specific profit level, rate of profitability, profit maximisation
• What does the quote "Revenue is vanity, profit is sanity, but cash is KING" imply?

  Cash flow objectives are crucial for business
• What are typical cash flow objectives for a business?

  Maximum debt level, cash tied in working capital
• What does capital structure refer to in a business?

  The balance of equity and debt financing
• What are the two key capital structure objectives?

  Gearing ratio and debt/equity ratio
• What are return on investment objectives related to?

  Capital expenditure and return on investment
• How can return on investment be calculated?

  By dividing operating profit by capital invested
• What are the main types of financial objectives businesses set?

  1. Revenue Objectives

  • Revenue growth
  • Sales maximisation
  • Market share

  1. Cost Objectives

  • Cost minimisation
  • Unit costs

  1. Profit Objectives

  • Specific profit level
  • Rate of profitability
  • Profit maximisation

  1. Cash Flow Objectives

  • Maximum debt level
  • Cash tied in working capital

  1. Capital Structure Objectives

  • Gearing ratio
  • Debt/equity ratio

  1. Return on Investment Objectives

  • Level of capital expenditure
  • Return on investment percentage
• What does cash flow show in a business?

  Money moving in and out
• How does profit differ from cash flow?

  Profit is money left after expenses
• Where is cash flow reported?

  Cash flow statement
• Where can profits be found?

  Income statement
• What are the key differences between cash flow and profit?

  • Cash flow: money in and out of business
  • Profit: money left after expenses
  • Cash flow statement vs. income statement
• What is gross profit?

  Revenue minus direct manufacturing costs
• How is operating profit calculated?

  Gross profit minus operational costs
• What does net profit represent?

  Total after all deductions are accounted
• What deductions are included in the calculation of net profit?

  Interest and taxes among other deductions
• What are the three types of profit in business accounting?

  • Gross profit
  • Operating profit
  • Net profit