Financial objectives and constraints

• Profit
• Revenue targets - Important for a business in a growth market. 
• Cash flow targets - too little causes issues with suppliers and too much put aside will mean that the business miss out on opportunities
• Return on capital employed (ROCE) - Capital employed is all the long-term finance used to operate the business. Although this is  measure of profitability it concentrates on the use the business is making of its assets. The ROCE can be improved by reducing capital employed or by increasing net profit. 
• Shareholder returns:
  • Any increase in the value of the value of their shares will mean that they can sell their shares at a higher price than they were bought at. This is a capital return.
  • Shareholdres recieve income on their shares through the payment of dividends.
  • A business that is seen as a poor investmet by shareholders will find it very hard to attract investment. So they have to keep the level of profit and dividends at the right level to satisfy shareholders. 

Ownership v management

• In a small business the management and the owners are the same person. 
• In large companies such as a plc the management (directors) and the owners (shareholders) are usually seperate. 
• The shareholders will want to see a healthy and immediate return on their investments but the directors may have other aims; they may be looking for growth or diversification, or may be content to just keep the business ticking along. 
• An increasing trend in business is to offer bonuses to directors related to performance, so they may be driven to achieve high profits. 

Short term v long term 

• Some business goals, such as growth or diversification, will need investment. This may mean a reduction in short-term profits with the hope of increasing returns in the future.
• If a business is in difficulty it will need to focus more on survival, so increasing popularity will be a definate short-term goal. 

In some businesses the pursuit of profit may cause confict between the different groups with an interest in the business, as in the examples:

• The rise of interest in the environemtnhas meant that costs have increassed for many firms and therefore profit has been reduced. However, many firms have also discovered that hey can make huge savings, such as limiting waste. 
• Some firms are accused of driving the prices of their suppliers to the lowest possible level. Low supply costs increase profits. Businesses need to ensure that there is a balance between keeping costs low and maintaining the quality of the suppliers. 
• Taxation may be a consideration - tax avoidance.
• Public image - charity or sponsorship.

Internal constraints

Financial: The pursuit of higher profit might be constrained by lack of cash flow, esp. at a time of rising or even booming demand. 

Labour force: Any business activity requires the co-operation of the workforce. It is also important that the business has the manpower with the necessary skills.

Type of business: New or young buisness may set themselves financial objectives but because of inexperience or the difficulty in assessing a new market they may set unrealistic targets. Larger, more established businesses will find it easier to set and achieve their objectives because of the experience that they have. PLCs may be more constrained in their objectives, as they will have to satisfy the shareholders as well as the management. 

Operational: A firm that is close to full capacity may find that it has fewer opportunities for improvig the profitability of the business, unless it has the confidence and the resources to increase capacity, perhaps by moving to bigger premises. 

Competitive environment: The plans of almost every business can be affected by the behvaiour and reaction of competitors. A plan to increase profit margins by increasing prices may be destroyed if competitors react by reducing prices or by advertising their lower prices. 

Economic environment: A booming economy will help business to improve sales. However, high interest rates will reduce customer's disposable income and therefore spending, so financial targets may not be met. 

Government: A firm may find its financial objectives limited by regulatory or legislative activity.

Building in the constraints

Good business planning involves being aware of the possible constraints. The internal constraints are easier to evaluate. External constraints will alwsys be subject to more uncertainty as they are outside the power of the business. It is therefore important when setting financial objectives that the business includes a series of 'what if' scenarios when setting objectives.