5.1 - Financial objectives

Question 1

What is ROI (Return on investment), and how is it calculated?

Answer 1

Return on investment allows a business to calculate the efficiency of a project by comparing the amount invested with the amount returned.
(profit from investment) ÷ investment cost) × 100.

Question 2

Give five examples of potential financial objectives or goals for a business.

Answer 2

A business may use long-term funding targets as a financial objective. A business may set an objective of ensuring that no more than 25% of its long-term funding comes from debt.
Setting targets to reduce long-term funding from debt can protect a business if there is an increase in interest rates.

A business may use return on investment as a financial objective.

Revenue

Cash flow

Costs

Businesses may consider capital structure objectives when setting their targets. Capital structure targets focus on the proportion of capital received from different sources of finance.

Question 3

State possible influences on financial objectives.

Answer 3

Shareholders

Competitors

Overall business objectives