Financial objectives are goals set by a company's finance department to achieve specific targets related to profitability, cash flow, costs, and returns within a set timeframe. Common financial objectives include return on capital employed targets, shareholder returns targets, cost minimization targets, and cash flow targets. Financial objectives are influenced internally by a company's corporate objectives and resources, and externally by factors like the market, competitors, and suppliers.
2. Recap
• What is a corporate objective?
• What are business functions?
• Can you give and example of a functional
objective?
• How are functional objectives and corporate
objectives related?
• What is the relationship between functional
objectives and the functional strategies?
3. Financial objectives and accounts
What we will examine;
• The types of financial objectives businesses
pursue
• The external and internal influences on
financial objectives
4. Key terms
Profit- the surplus of revenues over total costs
at the end of a trading period
Cash flow- the movement of money in and out
of a business over a period of time
Return on Capital Employed- the net profits of a
business expresses as a percentage of the value
of capital employed
5. Financial objectives
• A goal or target pursued by the finance
department within an organisation
• Likely that it will contain a specific numerical
element and also a timescale within which it is
to be achieved
• It will be set by the managers responsible for
the finance of the business
7. Financial objectives
• Return on capital employed (ROCE) targets
• Shareholders’ returns
• Cost minimisation
• Cash flow targets
8. Cash-flow targets
Cash-flow is the money Examples;
coming in (inflows) and out • Maintaining a minimum closing
(outflows) of a business monthly cash balance
• Reducing the bank overdraft by a
certain sum by the end of the year
• Creating a more even spread of
sales revenue
• Spreading its costs more evenly
• Achieving a certain level of liquid,
Many businesses get into non-cash items.
difficulty due to a lack of cash • Raising certain levels of cash at a
flow rather than lack of particular point in time
profitability. • Setting contingency fund levels
9. Cost minimisation
This type of target benefits a business Examples:
in two ways: • Achieving a certain cost
• It can keep its price the same and reduction in the purchase
benefit from a higher profit of raw materials
margin • Reducing wage cost per
• It can use its cost reduction to unit
reduce selling price of its finished • Lowering levels of wastage
product and t as a result attract • Relocating the business to
more customers the ‘least-cost’ site
• Reducing the cost per
thousand customers (CPT)
of the business’s promotion
These types of targets should be made and advertising
with caution as cheaper raw materials • Improving the efficiency of
may lead to inferior quality production by reducing
variable costs per unit
10. ROCE targets
Capital employed is a measure of the value Examples;
of the resources used by a business and is • To achieve a ROCE that
an excellent guide to its size. exceeds the level recorded in
Profit targets are often expressed as a the previous year by a
return on capital employed. certain percentage.
• To achieve a ROCE that
compares favourably to the
average ROCE achieved in
the UK
• To achieve a ROCE that
exceeds the level of a
particular competitor or
group of competitors
11. Shareholders’ returns
Examples;
A business must satisfy the needs of its • A high dividend per share
owners. Many shareholders assess a • A high dividend yield
business in terms of dividends they receive. • Increasing the share price
However they may have other objectives • High earnings per share
that need to be considered (non-financial)
12. Reasons for setting financial objectives
• Act as a focus for decision making and effort
• Provide a yardstick against which success or failure can be
measured
• Improves coordination
• Improves efficiency
• Allows shareholders to assess whether the business is going to
provide a worthwhile investment
• Enables outside organisations (suppliers and customers), to confirm
the financial viability of a business
13. Internal influences on FO
• Corporate objectives
• Nature of the product that is sold
• Objectives of the senior managers
• Finance
• Human resources
• Operational factors
• Resources available
14. External influences on FO
• PESTLE analysis
• Actions of other businesses
• Market factors
• Suppliers
15. Case Study
AQA A2 2nd edition Business Studies textbook
Page 17, Case Study 1 ‘Halfords heads east’
Case study Questions ONLY! (1&2)
