5 Financial Objectives 36

Question 1

How are financial objectives set?

Answer 1

Financial objectives are determined by taking into account the overall company aims

Decided by taking into account the internal position of the business and the external business environment.

Question 2

What makes a good financial objective ?

Answer 2

The financial objectives should be SMART:

Specific: Clearly defined so that all staff know and understand the aims

Measurable: If objective can be measured, it is possible to see of the target has been achieved

Achievable: Must be achievable, target that is impossible is demoralizing for staff, could create poor shareholder and public confidence.

Realistic: Objective should make good business sense

Time-bound: Targets usually relate to the company’s financial year

Question 3

Types of financial objectives?

Answer 3

Return on Investment
Financial Safety
Capital Structure 
Capital Spending
Cost Minimization

Question 4

Return on Investment :

Answer 4

There is always a risk attached to investment
Important to calculate the ROI to predict whether the risk is worth it
ROI = Profit (or loss!) / investment * 100

Question 5

Financial Safety :

Answer 5

Keep debt levels under control

“50% is the maximum allowable debt level for the business”

Question 6

Capital Structure :

Answer 6

If operating in a risky industry, ensure debt is cleared when sales are high
The business will be more likely to survive during times of difficulty

Question 7

Capital Spending :

Answer 7

For innovative markets ensure profit margins are high to finance R & D or future investment spending
For a high profit margin the use of price skimming.

Question 8

Cost Minimisation :

Answer 8

Lowering costs reduces waste and increases profit margin

Question 9

What is the Return on Investment formula?

Answer 9

Return on Investment= (New Profit/Cost of investment) x100

Question 10

Internal VS External influences on financial objectives…

Answer 10

Internal
1.Ambitions of the leader:
May want to see rapid sales growth
2.Cash flow:
Cash flow issues can limit finance objectives
3.Capacity:
Limited scope to increase sales if already at full capacity

External (PESTLE):
1.Competition:
Price wars can lead to reduced profit margins
2.Economic:
Poor economic environment might mean that unemployment is high and consumer spending is low
3.Government:
Legislation can impact the cost of production and hence profit margins