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SMART Objectives are ...
- Specific
- Measurable
- Agreed
- Realistic
- Timely
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Corporate Objectives vs Functional Objectives
- Corporate objectives - refer to the business as a whole
- Functional objectives - for specific departments
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Shareholders vs stakeholders
- Shareholder - someone who owns a part of the business
- Stakeholder - someone with a legitimate interest in the business
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Definition of profit margin
The proportion of revenue from each sale that is profit
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Ways of increasing profit margin (2)
- Increase prices
- Reduce costs
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Why does a higher profit margin not always mean higher profit?
- Increasing prices can reduce demand and cause a fall in revenue
- Reducing costs can impact on quality and reduce demand
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Internal factors influencing financial objectives (3)
- Overall objectives of the business
- Status of the business
- Employees
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External factors influencing financial objectives (4)
- Availability of finance
- Competitors
- The economy
- Shareholders
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Main things shown on a balance sheet (2)
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Net current assets = current assets - ?
Current liabilities
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Current Assets vs Non-Current Assets (3 examples for each)
- Current assets are things that can be turned into cash quickly, e.g. stock, debtors and cash in the bank
- Non-current assets have a life span of more than a year, e.g. premises, machinery, vehicles
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Which figure on a balance sheet includes depreciation?
Non-current assets
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Definition of liabilities (4 examples)
Money that the business owes, e.g. overdrafts, bank loans, unpaid taxes, money owed to creditors
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What two figures are always equal on a balance sheet?
Net assets and total equity
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Definition and equation for working capital
- The amount of cash (and assets that can be easily turned into cash) that the business has for its everyday activities.
- Working capital = current assets - current liabilities
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Define capital expenditure
Money used to buy fixed assets
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Why do businesses allow for depreciation on their assets?
To give a fair and true view of the business current state
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Retained profit = net profit - ( ? )
Tax + dividends
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Main ways profit is used (2)
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Why can income statements that cover less than 12 months be misleading?
Seasonal variance
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Equation for acid test ratio
(Current assets - stock) / Current liabilities
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Equation for current ratio
Current assets / current liabilities
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Equation for asset turnover ratio
Sales revenue / assets
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Equation for inventory turnover ratio
Cost of sales / cost of average stock held
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Equation for ROCE
Operating profit / (total equity + non-current liabilities) x 100
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What does ROCE tell you?
How much money a business makes compared to how much money has been put in to it
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Equation for gearing
Gearing = long term loans / (total equity + non current liabilities) x 100
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Examples of internal finance (3)
- Retained profit
- Rationalisation (selling assets to reorganise the business)
- Squeezing working capital (reducing stock held, delaying payments to suppliers, speeding up creditors)
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Examples of external finance (3)
- Trade credit with suppliers
- Overdrafts
- Debt factoring
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Define cost and profit centres
- Cost centres are any part of the business that directly incur costs
- Profit centres are any part of the business that generate revenue as well as incurring costs.
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Equation for ARR
Average annual profit / investment x 100
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