3.5.1 Setting financial objectives Flashcards
Financial objectives
The monetary targets a business wants to achieve within a set period of time
Why would a business set financial objectives?
-To expand
-Don’t overspend
-More comfortable financially
-Helps with decision making
-Examines reasons for success and failures in different areas
Examples of financial objectives
-Survival
-Break even
-Cash flow
-Minimise costs
-Maximise shareholder return
-Growing the capital value of the business
Cash flow targets
-Spread out costs more evenly
-Maintain a minimum cash balance
-Establish a contingency fund
-Create a more even spread of sales revenue
-Reduce dependence upon bank overdrafts
Why is profit important?
-Allows you to expand because you can reinvest (Safer source of finance)
-Allows for more investors (shareholders)
To cut fixed costs
-Close branches/factories
-Move head office into the factory
-Less staff (redundancy)
To cut variable costs
-Renegotiate with supplies
-Look for new supplies
-Redesign goods, making them cheaper to produce whilst maintain quality
Return on investment
-A measure of a firms profitability and performance
-Allows for comparisons between alternative investment opportunities
ROI targets
-Benchmark to industry standard
-Internal bench marking
-External factors ie interest rates
Return on Investment formula
Operating profit/capital invested x 100=% (how much was generated in profit that year)
Capital structure
Keeping debt under control and not relying on borrowing too heavily in order to finance the company
Capital structure targets
The spending undertaken by businesses to purchase assets such as machinery, vehicles and property
Revenue targets
-Maximise sales
-Increase in sales revenue
-Exceeding the sales of a competitor
How will a business achieve their targets?
-Increase marketing
-Lower the prices
Profit targets
-Increase in profit
-Profit maximisation (e.g lowering variable costs)
-Exceeding the profit of close competitors
