3.5.1 Setting financial objectives

• Financial objectives are the specific focused aims and goals of the finance department function within an organisation
• Financial stratagies are the medium to long term plans designed to achieve the firms financial objectives
• Finanical tactics are the short term financial measurements abated to meet the needs of a short term threat or opportunity
• Profit maximisation is achieved by increasing revenue, reducing costs and managing working capital effectively
• Revenue can be increased through price increases, selling more products/services, expanding into new markets etc.
• Why would a business set finanical objectives?

  To survive/break even

  Provide a focus

  Motivate employees

  Become efficient
• Whare are some drawbacks of financial objectives?

  Things change - become out of date

  If not reached staff become demotivated

  Lack of data - can’t create realistic goals
• What are some financial objectives?

  Return on investment

  Capital structure

  Revenue

  Costs

  Profit

  Cash flow
• Gross profit = sales revenue - direct costs (variable costs)
• operating profit = gross profit - indirect costs (expenses)
• profit for the year = operating profit - final costs
• Revenue growth is aiming to grow total revenues by 10% or reach £1 million in sales during a year
• Sales maximisation is the aim to maximise total sales regardless of weather those sales are profitable to increase market share or induce economies of scales
• Costs minimisation aims to achieve the most cost-effective way of delivering goods and services to the required level of quality
• How can a firm cut costs?

  Squeezing suppliers - undermining profits, using brand size

  Reducing wages

  Better recruitment

  Boosting productivity through investment

  Delayering

  Move production
• Benedits of effective cost minimisation?

  Lower unit costs

  Higher operating profits

  Improved cash flow

  Higher return on investment
• What is return on investment?

  How much your getting back from your investment
• Return on investment (ROI) is a measure of a firms profitability, ROI targets are set as a percentage of the initial investment, it is

  • benchmark to industry standard
  • internal benchmark
  • external factors
• ROI = (operating profit) / (capital invested) x 100
• The capital of a business represents the finance provided to it to enable it to operate over the long-term, there are 2 parts

  • equity
  • debt
• Equity is the amount investest by the owners of the business
• Debt is finance provided to the business by external parties
• What are the pros of debt for capital?

  All future profits stay within the business
• What are the cons of debt for capital?

  Have to pay it back plus intrest
• What are the pros of equity for capital?

  Don‘t have to pay back

  Don’t have to pay interest
• What are the cons of equity for capital?

  Profits belong to share holders
• debt equity ratio = (debt/equity) x 100
• Reasons for high equity?

  Greater business risk

  More flexibility required
• Reasons for high levels of debt?

  Interest rates high = cheap debt

  Profits and cash flows are strong debt paid easily