Cash Flow Targets
- Maintaining a minimum closing monthly cash balance
- Minimum cash balance of £10,000 for a small business is a good target.
- Reducing bank overdraft by certain sum by the end of the year
- An overdraft is necessary to support everyday expenses, however not advisable to keep a high overdraft so paying off by a certain date is a good target
- Creating a more even spread of sales revenue.
- Spread the sales expenses over the whole year.
- Spreading its costs more evenly.
- Pay monthly rather than quarterly or every 6 months.
- Achieving a certain level of liquid, non-cash items.
- Holding certain assets such as stock can allow quick turning of assets in to cash if company struggle with cash flow.
- Raising certain levels of cash at a particular point in time.
- Building stock levels for Christmas
- Setting contingency fund levels.
- Emergency source of cash if unexpected difficulties occur
- It can keep prices the same and benefit from a higher profit margin
- It can use its cost reduction to reduce the selling price of its finished product and thus attract more customers
- Achieving a certain cost reduction in purchase of raw materials.
- Reducing wage costs per unit.
- Lowering levels of wastage.
- Relocating the business to the 'Least-cost site'
- Reducing the cost per thousands customers (CPT) of the business's promotion and advertising.
- Improving the efficiency of production by reducing variable costs per unit.
The capital employed is a measure of the value of the resources used by a business and is an excellent guide to its size. Profit targets are often expressed as a ROCE which uses the formula below
- ROCE = Operating Profit /Capital Employed x 100
Three types of objectives for ROCE
- A ROCE that exceeds the level recorded in the previous year by certain percentage.
- A ROCE that compares favourably to the avg ROCE achieved in the UK.
- A ROCE that exceeds the level of a particular competitor or group of competitors.
Shareholders' Return Financial Objectives
A business must satisfy the needs of its owners/shareholders. Often assets in terms of the dividends received because a high dividends are linked to high profit and good financial performance. Examples of financial objectives:
- A high dividend per share.
- The dividend is the payment made to each shareholder as their part of the profit.
- A high dividend yield.
- This shows the dividend paid as a percentage of the market value of the share.
- Increasing the share price.
- The share price tends to reflect the value of the business,a business that retains its profits & grows should result in increased share price
- High earnings per share.
- Earnings per share measured as the total profit divided by the number of shares.
Reasons for setting Financial Objectives
- Act as a focus for decision making.
- Provide a yardstick against which success or failure can be measured.
- Improve coordination, by giving teams and departments a common purpose.
- Improve efficiency, examining success & failure accross different areas.
- Allows shareholders to assess if business is going to provide an investment.
- Enable outside organisations e.g suppliers and customers, to confirm financial viability.
Internal Influences on Financial Objectives
Corporate Objectives - the overall aims of an organisation area a key influence on the objectives of a functional areas e.g sainsburys aim to get customers to up increase spend per visit.
Finance - 'Money makes Money' A company making lots of money can afford to invest a greater amount in marketing and other areas to further make more money
Human Resources - achieving financial objectives depends on the efforts and skills of the workforce. Good recruitment and training along with effective workforce planning can enable a business to increase profitability. conflict can arise between employees and financial objectives.
Operational Factors - efficient operations allows high quality products of low price to be produced.
Resources Available - a strong resource base allows targets to be achieved.
Nature of the Product - often about being in the right place at the right time and the product can be central to the success of a business
External Influences on Financial Objectives PESTLE
External Factors can be classified by PESTLE
- Political Factors - financial objectives often guided towards wishes of the share holders, however greater openness has led to expectations on business to serve other groups e.g Workforce, customers, the local community and the environment.
- Economic Factors - the state of the economy influences performance of business. e.g recessions cause a drop in sales and therefore profit targets must be adjusted.
- Social Factors - society constantly changes and therefore businesses must adapt e.g people expect access 24-7 if possible.
- Technological Change - leads to improvements in communication or general savings on costs due to increased efficiency.
- Legal Factors - legal requirements can have big impacts on objectives e.g motor industry changes in environmental legislation can effect both production and product
- Environmental Factors - growing environmental awarness among consumers and actions by pressure groups means that gaining supplies form ethical suppliers and gaining a reduced carbon footprints is know an aim for many companies
Other External Factors
- Market Factors - Demand for certain products go through a cycle of expansion and decline. Product reaches maturate, high levels of profit become the main objective.
- Competitors Actions and Performance - level of competition influence a firms objectives minimal competition results in higher profits being able made.
- Suppliers - having good relationships with suppliers results in good prices and having a monopoly on supplies can result in an advantage over the other competitors. e.g the co-op is a major player in UK farming and supplies its shops with food products however its not amongst the cheapest as other countries have produced cheaper produce.
Two key documents :
- The Balance Sheet - a document described the financial position of a company at a particular point in time, by comparing assets and liabilities.
- The Income Statement - an account showing the income and expenditure of a firm over a period of time.
Analysing a Balance Sheet
A balance sheet looks at the accumulated wealth of a business and can be used to assess its overall worth. it lists assets and liabilities. in addition, it shows the equity provided by the owners. Equity is provided through either the purchase of shares or the agreement to allow the company to retain or put back into the business.7
- Assets - items that are owned by an organisation.
- Non-current assets - resources that can be used repeatedly in production process, although they do wear out or lose value.
- Tangible assets - non-current (fixed) assets that exist physically
- Intangible assets - non-current assets that do not have a physical presence, but are nevertheless of value to a firm.
- Assets can be divided into current and non-current assets.
In general, non-current assets are purchased to allow the business to operate continuously. Land and buildings are acquired so that the firm has the premises from which to operate. Machinery/Equipment to produce products and sell goods/services. Current assets are things such as Inventories (products, work-in progress and raw materials) and Receivables (debtors).
- Liabilities can be divided into current and non-current (long term) liabilities
Non-current liabilities are debentures and long term or medium term loans. Current liabilities are payables, bank overdrafts, corporation tax and shareholder dividends. Payables are people the firm own money to.
- Capital is split into 2 forms Share Capital and Reserves and Retained Earnings.
Most reserves arise because shareholders have voted at the annual general meeting to allow firm to keep some profit, rather than distribute to shareholders