5.1 Setting financial objectives

Question 1

Benefits of setting financial objectives

Answer 1

• Provide direction and can be used to measure financial performance
• Used to support decision making throughout the business
• Used to motivate employees and teams of employees

Question 2

What is ROI

Answer 2

Return on Investment:
Often a financial objective = allows a business to calculate the efficiency of a project by comparing the amount invested with the amount returned

Question 3

How to calculate ROI

Answer 3

profit from investment / investment cost X 100

Question 4

Long-term funding

Answer 4

Financial objective: ensuring that no more than 25% if its long-term funding comes from debt
- it can protect a business if there is an increase in interest rates

Question 5

What factors are involved when setting financial targets

Answer 5

• Revenue
• Costs
• Cash flow (always enough cash to meet short-term debts)
• Investment (cover total expenditure)
• Capital structure

Question 6

How to calculate revenue

Answer 6

Quantity of sold goods X selling price per item

Question 7

How to calculate total costs

Answer 7

Fixed costs + variable costs

Question 8

What are the influences on financial objectives

Answer 8

• Overall business objectives
• Different departments (all working towards the same overall aim)
• Shareholders (need to be satisfied)
• Competitors (can affect demand and revenue)