5.1 - Financial objectives

• Financial Objectives


  What the business wants to Achieve Financially
• Financial objectives


  • Financial goals that a business wants to achieve
  • Businesses usually have specific targets in mind, and a specific period of time to achieve them in
  • E.g. a business might have an objective to increase its profits by 10% within three years
• Financial objectives


  • Set by financial managers
  • Help the business achieve its corporate objectives
  • Must be consistent with the functional objectives of the other departments
• Financial objectives


  • Can improve coordination between teams
  • Act as a focus for decision-making
  • Allow shareholders to judge whether a business would be a worthwhile investment
• 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
• Companies set


  • 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
• Profit

  Includes all transactions that will lead to cash in or out, now, or in the future
• 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
• If a business produces too much


  They'll have to pay suppliers and staff so much that they'll become insolvent before they have the chance to get paid by their customers. This is called overtrading
• Cash flow objectives


  • Help prevent cash flow problems
  • Spread revenue or costs more evenly throughout the year
  • Acquire a specified amount of liquid assets (an asset that can be turned into cash quickly)
  • Target a minimum cash balance
• Return on Investment Objectives

  Help a business stay Profitable
• Return on investment (ROI)


  • Measures how efficient an investment is
  • Compares the return from a project to the amount of money that's been invested in it
  • The higher the ROI, the better
• Companies might set a target value for the ROI of an investment or use it to compare the profitability of two potential investments
• 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 that are used over and over again to produce goods or services
• 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, a combination of debt capital and equity capital
• Setting a capital structure objective


  1. Set a debt to equity ratio

  2. Reduce the proportion of debt in long-term funding
• Internal factors influencing financial objectives


  • Overall objectives of the business
  • Status of the business
  • Other areas of the business
• External factors influencing financial objectives


  • Availability of finance
  • Competitors
  • The economy
  • Shareholders
  • Environmental/Ethical influences
• Financial objectives need to be consistent with the corporate objectives of the business
• New businesses might set ambitious targets for revenue to grow quickly and establish themselves
• Established companies might be satisfied with smaller increases in revenue if they're not actively trying to grow
• Financial objectives might be limited by what's happening in other departments of the business
• Cash flow targets might depend on how easy it is for the business to get credit
• If new competitors enter the market, or demand for competitors' products increases, a business might set an objective to cut costs to be more competitive
• 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