Business

• Profit


  The main goal for most businesses
• If a business produces too much, they'll have to pay suppliers and staff so much that they'll become insolvent before they have the chance to get paid by their customers
• Businesses measure their profits on a regular basis and compare to previous periods to measure progress
• If profits go down, even if still making large profits, this is bad news
• Cash flow objectives


  Put in place to help prevent cash flow problems
• Percentage change in profit

  Formula: (Current Year's Profit - Previous Year's Profit) / Previous Year's Profit x 100
• Cash flow objectives

  • Spread revenue or costs more evenly throughout the year
  • Acquire a specified amount of liquid assets
  • Target a minimum cash balance
• Methods to increase profits

  • Increase prices (if demand is price inelastic)
  • Reduce prices to increase demand (if demand is price elastic)
  • Reduce costs of production
  • Use advertising to increase demand
• Return on investment (ROI)

  Measures how efficient an investment is — it compares the return from a project to the amount of money that's been invested in it
• Improving quality can reduce costs from returns or unacceptable quality, leading to increased profits
• Gross profit

  Sales revenue - cost of sales
• The higher the ROI, the better
• Companies might set a target value for the ROI of an investment or use it to compare the profitability of two potential investments
• Operating profit

  Sales revenue - cost of sales - operating expenses
• Capital expenditure (or investment)


  The money spent to buy fixed assets
• Profit for the year

  Operating profit + other profit - net finance costs - tax
• Businesses may set an investment objective to help achieve a set amount of capital expenditure during a year
• Profit margin

  Measures the relationship between profit and sales revenue
• Capital structure


  The way a business raises capital to purchase assets
• Gross profit margin

  Gross profit / sales revenue x 100
• Debt capital

  Borrowed funds
• Operating profit margin

  Operating profit / sales revenue x 100
• Equity capital


  Capital raised by selling shares, also known as share capital
• Profit for the year margin

  Profit for the year / sales revenue x 100
• A common capital structure objective is to set a debt to equity ratio, e.g. 1.5:1 after 4 years
• A high profit for the year margin is attractive to shareholders as it indicates potential for high dividends
• Sometimes businesses set targets to reduce the proportion of debt in their long-term funding
• Internal factors influencing financial objectives

  • Overall objectives of the business
  • Status of the business
  • Other areas of the business
• External factors influencing financial objectives

  • Availability of finance
  • Competitors
  • The economy
  • Shareholders
  • Environmental/Ethical influences
• Cash Flow Cycle

  The Gap between Money Going Out and Coming In
• Cash inflows

  Sums of money received by a business, e.g. from product sales or loans
• Cash outflows

  Sums of money paid out by a business, e.g. to buy raw materials, or pay wages
• Cash flow cycle


  1. Businesses need to pay out money for the costs of producing an order, or for assets like machinery, before they get paid for that order

  2. Delay between money going out and money coming in
• It's important to make sure there's always enough money available to make payments
• Not paying has costs of 12000, and will be paid for after a one-month credit period
• For new businesses the cash flow cycle can be a big problem because they need money for start-up costs before they've made any sales at all
• Working capital


  The money available to a business for its day-to-day running costs
• Length of the cash flow cycle

  • Depends on the type of product and credit payments
• Factors affecting length of cash flow cycle

  • Type of product
  • Credit payments
• Creditors


  People who are owed money by the business