Financial Objectives of Businesses

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

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)

The Key Financial Objectives:

• Revenue:

  • Revenue growth (% or value)

  • Sales maximisation

  • Market share

• Costs:

  • Cost minimisation

  • Unit costs

• Profit:

  • The specific level of profit (in absolute terms)

  • Rate of profitability (% of revenues)

  • Profit maximisation

• Cash Flow:

  • Maximise cash balances

  • Limited how much is tied up in working capital

  • Cash flow to profit %

• Capital Structure:

  • % of capital provided by debt (gearing)

  • Debt/equity ratio

• Return on Investment:

  • Level of investment (£)

  • Return on investment (%)

  • Return on capital employed % (ROCE)