Understanding Financial Objectives
Financial Aims: the broad, general goals of the finance and accounting function or department within an organisation.
Financial Objectives: the specific, focused targets of the finance and accounting department within an organisation.
Financial Strategies: long-term or medium term plans, devised at senior management level, and designed to achieve the firm’s financial objectives.
Financial Tactics: short-term financial measures adopted to meet the needs of a short-term threat or opportunity.
The examples set out below illustrate the types of financial objective that a business might pursue;
Many businesses get into financial difficulties because of lack of cash flow rather than lack of overall profitability. Consequently, it is vital that businesses set themselves cash-flow targets to ensure they are able to keep operating. E.g.
- Maintaining a minimum closing monthly cash balance, for example a minimum cash balance of £10,000 would be a sensible target for a small newsagents
- Reducing the bank overdraft by a certain sum by the end of the year
§ For new start-up companies, it is likely an overdraft will be needed to support everyday expenses
§ Interest means it is not advisable to sustain an overdraft, therefore businesses may set objectives with this in mind
- Creating a more even spread of sales revenue
- Spreading costs more evenly
- Achieving a certain level of liquid, non-cash items
- Raising certain levels of cash at a particular point in time
- Setting contingency funds
A business that reduces its costs can benefit in two ways; keeping prices the same therefore having a higher profit margin, or reducing the selling price to attract more customers. E.g.
- Achieving a certain cost reduction in the 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 thousand customers of the business’ promotion and advertising
- Improving the efficiency of production by reducing variable costs per unit
The success of a business is invariably demonstrated by its profit levels. Clearly, large firms will achieve higher profit levels than smaller businesses, so the profit needs to be compared to the size of a business. E.g.
- Achieve an ROCE that exceeds the level recorded for the previous year by a certain percentage
- Achieve an ROCE that compares favourably to the average ROCE achieved in the UK
- Achieve an ROCE that exceeds the level of a particular competition
A business must satisfy the needs of its shareholders/owners. Many shareholders assess a business in terms of dividends received because a high dividend is likely to be linked to high profit levels and sound financial performance. E.g.
- High dividend per share which will indicate a well performing business and will benefit shareholders with…