Business Studies Unit 3 - Objectives and Financial Strategies
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SMART Objectives are ...
Corporate Objectives vs Functional Objectives
- Corporate objectives - refer to the business as a whole
- Functional objectives - for specific departments
Shareholders vs stakeholders
- Shareholder - someone who owns a part of the business
- Stakeholder - someone with a legitimate interest in the business
Definition of profit margin
The proportion of revenue from each sale that is profit
Ways of increasing profit margin (2)
- Increase prices
- Reduce costs
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
Internal factors influencing financial objectives (3)
- Overall objectives of the business
- Status of the business
External factors influencing financial objectives (4)
- Availability of finance
- The economy
Main things shown on a balance sheet (2)
Net current assets = current assets - ?
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
Which figure on a balance sheet includes depreciation?
Definition of liabilities (4 examples)
Money that the business owes, e.g. overdrafts, bank loans, unpaid taxes, money owed to creditors
What two figures are always equal on a balance sheet?
Net assets and total equity
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
Define capital expenditure
Money used to buy fixed assets
Why do businesses allow for depreciation on their assets?
To give a fair and true view of the business current state
Retained profit = net profit - ( ? )
Tax + dividends
Main ways profit is used (2)
Why can income statements that cover less than 12 months be misleading?
Equation for acid test ratio
(Current assets - stock) / Current liabilities
Equation for current ratio
Current assets / current liabilities
Equation for asset turnover ratio
Sales revenue / assets
Equation for inventory turnover ratio
Cost of sales / cost of average stock held
Equation for ROCE
Operating profit / (total equity + non-current liabilities) x 100
What does ROCE tell you?
How much money a business makes compared to how much money has been put in to it
Equation for gearing
Gearing = long term loans / (total equity + non current liabilities) x 100
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)
Examples of external finance (3)
- Trade credit with suppliers
- Debt factoring
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.
Equation for ARR
Average annual profit / investment x 100
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