Setting Financial Objectives
Business: AQA A Level (2023 Specification), topic 5.1.1
Financial Objectives
Objectives are important for any business' finance department. Financial performance needs to be measured against the business' objectives.
Benefits of financial objectives
- Financial objectives provide direction and can be used to measure financial performance.
- Financial objectives can be used to support decision making throughout the business.
- Financial objectives can be used to motivate employees and teams of employees.
Return on investment
- A business may use return on investment as a financial objective. Return on investment can be measured using (profit from investment) ÷ investment cost) × 100.
- Return on investment allows a business to calculate the efficiency of a project by comparing the amount invested with the amount returned.
Long-term funding
- 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.
Cost, Revenue and Profit for Financial Goals
Businesses can use cost, revenue and profit objectives to set financial goals.
Revenue
- Businesses may consider revenue when setting their targets. Revenue is also known as sales revenue or turnover and can be calculated: quantity of goods sold x selling price per item.
Cost
- Businesses may consider cost when setting their targets. Total cost is calculated by adding together fixed costs and variable costs.
Cash flow
- Businesses may consider cash flow objectives when setting their targets. Cash flow compares cash inflows and cash outflows to ensure a business always has enough cash to meet its short-term debts.
Investment
- Businesses may consider investment objectives when setting their targets. Investment objectives cover the total expenditure planned by a business to develop capital projects
Test yourself on Setting Financial Objectives
What can return on investment help calculate?
A business invests in a project. It costs £1 million. The revenue generated by the investment is £2.5 million. What is the return on investment?
A company has a revenue of £75,000,000. It sells 50,000,000 units. What is the sale price per unit?