Financial Objectives

• Financial Objectives are the monetary targets a business wants to achieve within a set period of time
• Financial Objective Includes: Return on investment, Capital Structure, Revenue, Costs, Profit, and Cash Flow
• Return on Investment is a ratio of profit earned by a business to the amount of money invested in the business.
• ROI targets will be set as a %
• ROI allows for comparisons between alternative investment opportunities
• ROI

  Operating profit / Capital Invested x 100
• Capital Structure is the relative ways in which the capital has been raised
• Long term funding is the amount of capital that has been invested in a business and will stay in the business for over a year.
• Long Term funding can come from 2 sources

  • Equity (Eg. Capital invested by shareholders)
  • Debt (Eg. Money borrowed from financial institutions)
• Some long term funding is compulsory interest bearing
• Compulsory interest bearing meaning that regardless of profits, interest and repayments must be made to financial institutions
• Interest represents a cost to the business
• A business may set a Capital Structure objective to keep the proportion of long term funding that is debt below a certain percentage.
• The proportion of funding that is debt is referred to as gearing.
• Revenue objectives are targets set for the amount of money coming into a business from sales in a set period of time
• Cost Objectives are limits set for the amount of money that is spent on expenditure in a set period of time
• Profit

  Revenue - Total Costs
• Profit Objectives are limits set for the amount of surplus to be achieved in a set period of time
• Types of Profit

  Gross Profit = Sales Revenue - Cost of sales
• Types of Profit

  Operating Profit = Gross profit - Expenses
• Cost of sales are costs directly linked to production of goods and services sold
• Expenses are all other costs associated with the trading of the business (Eg. salaries and marketing expenditure)
• Types of profit

  Profit of the year = Operating profit - interest and taxation
• Cash flow is the movement of money into and out of a business
• If the net cash flow is negative, more money is flowing out quicker than it is flowing in, then a business may face cash flow (Liquidity) problems
• Positive net Cash Flow is necessary to meet the short term objective of survival
• Healthy cash flow is necessary to meet day to day expenses
• A cash flow target may be to keep surplus in order to take advantage of unforeseen opportunities
• Profit exists in financial records when total revenue is greater than total costs
• Cash is the physical existence of money within a business
• Profitable businesses can fail because of Cash
• Internal Influences on financial objectives include: Corporate and other functional objectives, Characteristics of the firm, relationship between owners and directors or whether the business is public or private sector.
• External influences on financial objectives include: Competitors, consumers, economic conditions and the external environment
• Characteristics of the firm

  • Capital vs Labour intensive
  • Established or new
  • Low cost or highly differentiated