Financial Objectives

Financial Objectives

Objectives are important for any business' finance department. Financial performance needs to be measured against the business' objectives.

Benefits of financial objectives

• Financial objectives provide direction and can be used to measure financial performance.

• Financial objectives can be used to support decision making throughout the business.

• Financial objectives can be used to motivate employees and teams of employees.

Return on investment

• A business may use return on investment as a financial objective. Return on investment can be measured using (profit from investment) ÷ investment cost) × 100.

• Return on investment allows a business to calculate the efficiency of a project by comparing the amount invested with the amount returned.

Long-term funding

• A business may use long-term funding targets as a financial objective. A business may set an objective of ensuring that no more than 25% of its long-term funding comes from debt.

  • Setting targets to reduce long-term funding from debt can protect a business if there is an increase in interest rates.

Cost, Revenue and Profit for Financial Goals

Businesses can use cost, revenue and profit objectives to set financial goals.

Revenue

• Businesses may consider revenue when setting their targets. Revenue is also known as sales revenue or turnover and can be calculated: quantity of goods sold x selling price per item.

Cost

• Businesses may consider cost when setting their targets. Total cost is calculated by adding together fixed costs and variable costs.

Cash flow

• Businesses may consider cash flow objectives when setting their targets. Cash flow compares cash inflows and cash outflows to ensure a business always has enough cash to meet its short-term debts.

Investment

• Businesses may consider investment objectives when setting their targets. Investment objectives cover the total expenditure planned by a business to develop capital projects

Capital structure

• Businesses may consider capital structure objectives when setting their targets. Capital structure targets focus on the proportion of capital received from different sources of finance.

Influences on Financial Objectives

When considering financial objectives, several internal and external influences must be considered.

Overall business objectives

• Overall business objectives must be considered when setting finance objectives as finance objectives must support the business’ overall aim.

• If the business' strategy is to maximise revenue, then financial objectives to maximise profits may not line up incentives well. Amazon could be an example of someone who chooses to maximise revenue.

Different departments

• The objectives of other departments must be considered when setting finance objectives as all departments must be working towards the same overall aim.

Shareholders

• The actions of shareholders must be considered when setting finance objectives as shareholders need to be satisfied.

• For example, Tesco considers the views of its shareholders when deciding on objectives as the influence of shareholders and their desire to receive dividends may affect investment objectives.

Competitors

• The presence of competitors must be considered when setting finance objectives as competitors can affect demand and therefore revenue.