Unit 5 - Finance:

• Objectives


  What the business wants to achieve financially
• Financial objectives

  • Financial goals that a business wants to achieve
  • Specific targets in mind
  • Specific period of time to achieve them in
• A business might have an objective to increase its profits by 10% within three years
• Financial managers

  Set the financial objectives to help the business achieve its corporate objectives
• Financial objectives must be consistent with the functional objectives of the other departments
• Benefits of financial objectives

  • Improve coordination between teams
  • Act as a focus for decision-making
  • Allow shareholders to judge whether a business would be a worthwhile investment
• How businesses set financial objectives

  1. Look at their financial data (e.g. cash flow figures and profit margins)

  2. Assess their financial position

  3. Set objectives based on what they need to improve
• Types of financial objectives


  • Revenue objectives
  • Costs objectives
  • Profit objectives
• Revenue objectives


  Often set to increase the value or volume of sales
• Revenue objectives

  • Increase sales revenue by 5% in the next year
  • Beat a competitor's monthly sales
• Costs objectives


  Usually set to minimise costs
• Costs objectives

  • Reduce costs of raw materials by 10%
  • Reduce fixed costs by 15%
• If costs are reduced and the business still sells the same number of products at the same price, this will increase its overall profits
• Businesses have to be careful that cutting costs doesn't reduce the quality of their products or services, or raise ethical questions about how they operate — otherwise sales might drop and they'd end up with lower profits instead of higher profits
• Profit objectives

  Set a target figure for profit or for a percentage increase from the previous year
• Since revenue, costs and profit are closely linked, achieving revenue and costs objectives can help achieve profit objectives
• Cash flow objectives

  Aim to improve cash flow
• Cash flow

  All the money flowing into and out of the business over a period of time, calculated at the exact time it enters or leaves the bank account or till
• Cash flow calculations are pretty much the most important thing to a business in the short term
• Businesses need cash to survive. Looking at the long term, making a profit is the main objective
• If a business allows payments to be made on credit, this may damage their cash flow
• If a business needs to spend a lot of money on a new computer system or machinery, the outflow of cash could lead the business to a potential crisis
• Objectives

  Goals set by businesses for long-term investments and funding
• Capital

  Wealth in the form of money or other assets owned by a business
• Capital expenditure (or investment)

  Money spent to buy fixed assets
• Fixed assets

  • Factories
  • Vehicles
• Setting an investment objective

  1. Help achieve a set amount of capital expenditure during a year

  2. Reduce capital expenditure
• Capital structure

  The way a business raises capital to purchase assets
• Components of capital structure

  • Debt capital (borrowed funds)
  • Equity capital
• Equity capital

  Capital raised by selling shares, also known as share capital
• A common capital structure objective is to set a debt to equity ratio, e.g. 1.5:1 after 4 years
• Businesses sometimes set targets to reduce the proportion of debt in their long-term funding
• Internal factors influencing financial objectives

  • The overall objectives of the business
  • The status of the business
  • Other areas of the business
• The overall objectives of the business

  Financial objectives need to be consistent with the corporate objectives of the business
• The status of the business

  • New businesses might set ambitious targets for revenue because they're trying to grow quickly and establish themselves in the marketplace
  • Established companies might be satisfied with smaller increases in revenue if they're not actively trying to grow
• Other areas of the business

  Financial objectives might be limited by what's happening in other departments of the business
• External factors influencing financial objectives

  • The availability of finance
  • Competitors
  • The economy
  • Shareholders
  • Environmental/Ethical influences
• The availability of finance

  Cash flow targets might depend on how easy it is for the business to get credit
• Competitors


  If new competitors enter the market, or demand for competitors' products increases (due to a special offer or price reduction, etc), a business might set an objective to cut costs to be more competitive
• The economy

  • In a period of economic boom, businesses can set ambitious profit targets
  • In a downturn, they have to set more restrained targets, and they might also set targets to minimise costs