Understanding financial objectives

What are financial objectives?

Financial objectives are the goals or targets a business sets itself for its financial performance
Financial targets are likely to be more challenging
Larger businesses are likely to employ a team of accountants to help set financial targets
Financial objectives may relate to:
Cash flow targets;
Cost minimisation;
Return on capital employed;
Shareholders' return

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Cash flow of a business is the money flowing into and out of the business
Financial managers must ensure that the business has enough cash when it is needed
Cash flow forecasts will be produced to help plan the future cash position of the business
Advantages of setting cashflow targets is that the business is less likely to run out of cash
Targets might relate to the need for cash at particular times of the trading year
Businesses can set monthly cash flow targets. This might be part of their budgeting procedure

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ROCE is the amount of profit a business generates in relation to the amount of money invested in that business.
ROCE is likely to be of particular interest to the owners of the business
ROCE = PROFIT/CAPITAL EMPLOYED X 100
Can be used to make comparisons over time or between different companies

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Financial objectives can be influenced by the shareholders in a company
Shareholders are the owners of a company
Dividend per share - The dividend per share is the amount of money a shareholder is paid for every share owned.
Doesn't provide an accurate measure of the returns to shareholders
This is because the dividend per share must be compared with the price of the share

Dividend yield - The dividend yield is the dividend per share expressed as a percentage of the share price.
DIVIDEND YIELD = DIVDEND PER SHARE / SHARE PRICE X 100
A company might set targets for the dividend yield

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Stakeholders - the financial objectives set by a business are likely to be influenced by the stakeholders. It is likely that the strongest stakeholder group will have the most influence over the objectives.
Capacity - There is usually a limit to the amount a business can produce. Consequently this might act as a constraint on financial objectives.
Coporate strategy - Financial objectives are likely to be linked to the coporate strategy of a business.
Departmental influence - Many large businesses are organised into departments or divisions. In these circumstances particular departments might influence financial objectives.
Ethical stance - Some companies want to be seen as good corporate citizens. Consequently financial objectives may be less of a priority.

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Economic climate - If the economy is stable and growing at a sustainable rate a business is likely to have more choice when setting financial objectives. However, if the economic climate is poor a business may have less control.
Competition - The activities of rival businesses can have an impact on financial objectives
Consumer tastes - Changes in market conditions brought about by a shift in consumer tastes can affect the financial objectives set by a business.
Political factors - A change in government
Legislation - Quite a lot of government legislation is aimed at businesses. Generally, more legislation means extra costs which may dampen profits.
Pressure groups - Pressure groups such as Greenpeace, for example, may persuade companies to focus more on environmental objectives.
World events - Rising global oil prices may force companies that are heavily reliant on oil as raw material to downgrade financial objectives.

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Dividend per share - the amount of money received by a shareholder for every share owned.
Dividend yield - The amount recieved by a shareholder as percentage of the current share price.
Financial objectives - the goals or targets a business sets itself for its financial performance.
Total shareholder's return (TSR) - A financial return which takes into account both the increase in the share price and the dividend paid.

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