Financial objectives
Importance of financial objectives
💰 Financial measure determine the success of all other functional areas
💰 Financial measures such as profitability and shareholder value are two key reasons why people invest in a business
💰 Financial objectives are easier to manage than other functional objectives
💰 The level of long-term debt in a business increases risk. a business may set an objective to reduce debt
💰 Poor financial management is a key reason why a business may fail
Cash vs Profit
Cash balance
=
cash inflows
-
cash outflows
Profit
=
revenue
-
cost
The profit hierarchy
Revenue
Gross profit
operation profit
Profit of the year
Variable costs such as materials are taken away from revenue
Fixed costs such as salaries and overheads are taken away from profit
other incomes such as interest are taken into account and taxation
Revenue
setting revenue objectives helps drive a business's ambition to grow. Increased Revenue indicates the popularity of a product
Profit
Costs
cash flow objectives
Lowering costs may be important where a business is trying to improve efficiency
profits are often shared with all stakeholders and as such are the indicator that most businesses will be judged against
💲extending payment periods to suppliers
💲maintaining a specific level of cash reserves
💲shortening payment periods from customers
Investment and return on investment
Return on investment =
operating profit
capital invested
X 100
Capital stricture investment
Capital structure is the balances between capital from borrowing (loan) and the capital from selling shares
👥low gearing
👥danger of losing control of the business
👥high dividend payments to shareholders
💷high gearing
💷may be at risk of increasing interest payments
💷difficult to find further lending
Internal and external influences
🏚Other functions - objectives to improve efficiency may mean objectives to reduce costs
🏞The competitive environment
🏚nature of product - a product with a short life cycle may dictate that sales revenue is an important objective
🏞Economic enviornment
🏚corporate objectives
🏞Technology