Financial Objectives of Businesses

What is a financial objective?

What is a financial objective?

A specific goal or target relating to the financial performance, resources and structure of a business

• S: Specific

• M: Measurable

• A: Attainable

• R: Relevant

• T: Time-bound

What is the value of setting financial objectives?

• A focus for the entire business

• An important measure of success or failure for the business

• Help reduce the risk of business failure

• Provide transparency for stakeholders about their investment

• Help coordinate the different business functions

• The key context for making investment decisions (investment appraisal)

What are the features of revenue objectives?

• Revenue growth (% or value)

• Sales maximisation

• Market share

What are the features of cost objectives?

• Cost minimisation

• Unit costs

What are the features of profit objectives?

• The specific level of profit (in absolute terms)

• Rate of profitability (% of revenues)

• Profit maximisation

What are the features of cash flow objectives?

• Maximise cash balances

• Limited how much is tied up in working capital

• Cash flow to profit %

What are the features of capital structure objectives?

• % of capital provided by debt (gearing)

• Debt/equity ratio

What are the features of return on investment objectives?

• Level of investment (£)

• Return on investment (%)

• Return on capital employed % (ROCE)