Financial objectives

36.1 How financial objectives are set

Financial objectives are determined by taking into account the overall company aims. They express the financial objectives of the overall company plan. The internal aspects of the business, such as what the business is currently doing and what resources it has available, will determine what the business can achieve. The external environment will affect how easy it is to carry out the plans. An increase in sales is unlikely to be achieved in an economy that is going into recession

What makes a good financial objective?:

• SMART
• Specific
• Measurable
• Achievable 
• Realistic
• Timebound.

36.2 Types of financial objective

Return on in investment:

• Companies put their capital at risk whenever they take it out of the bank and invest it in an asset or an activity. Sometimes the investment proves a success, such as Whitbread plc's purchase of Costa for £23m in 1995.
• Sometimes the investment proves unwise, either producing dissapointing profits or, like Morrisons' purchasde of Kiddicare, significant losses and then selling it for £2m.

Financial safety:

• A key to long-term financial safety is to keep debt levels under control. A good rule of thumb is to say that no more than half a firm's financing should come from debt. Financial an analysts are especially likley to check the long-term finances of a business, to see if long-term bank loans are more than half the sum invested in the business in the long term. It would be a good financial target to say that 50% should be the maximum allowable debt level for the business. Help to avoid business collapse. 

Capital structure objectives:

• To maximise the chance of long-term fiancial safety, directors need to think of the right capital structure for their business. This should be based on an assessment of the level of operational risks they face. Between 1997 and 2005 French Connection was the best fashion brand in Britain, with its clever logo FCUK. Then the fashion-concious moved on. Even in 2014 the business was still making operating losses. 
• Fortunately for the company, founder and CEO Stephen Marks had - during the good times - made sure that the capital structure was super-safe. He reasoned that the fashion business is inherently risky; therefore the long-term capital structure was based on zero debt and so they survived the recession.

Capital spending objectives:

• For businesses in fiercly competitive technological markets, a key to long term success is to generate high enough profit margins to fund high levels of investment spending on capital employment and on R&D. The spending on capital equipment enables the quality and efficiency of production to rise, while spending on R&D can lead to product innovation.
• To achieve long term market share desired by the directors, generous objectives may be needed for capital spending and spending on R&D.

Cost minimisation:

• A business may concentrate on minimising costs. Lowered costs will increase profitability. This may be a general overall aim, such as reducing fixed costs, or it may be more specific, such as…