Notesale: Turn your study into money

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Setting Financial Objectives
Setting Financial Objectives:
Value:
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Clear set financial objectives are a measure of how the business is doing and can bring the
interest of shareholders, suppliers and customers
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O
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Equation: ROI =
Eg: Investing in a fish tank company costs £1000, after 12 months you sell it for £1300
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After 3 years it will be 300/ (1000x3) x100 which is 10%

Influences on Financial Objectives and Decision making:
Internal● Financial objectives should correspond with objectives in other areas of the business
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It needs to involve the operational objective of increasing its employees
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● The type of product/ service a business deals with
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● The size of business
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Eg a competitor selling for cheap
the same type of product
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● During an economic crash/recession, it will be harder to get loans and credit and maintain a
good cash flow
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● Shareholders influence objectives relating to profit as they want to see ROI before investing in
a business
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It can take out
loans however it has to consider the cost of debt it carries
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Capital expenditure/ investment- the amount of money invested in a business that is used to buy
assets that are fixed
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Objectives
could include:
● Increasing expenditure as new fixed assets are needed
● Decreasing expenditure to reduce overall costs
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Equation: Gross profit= sales rev- the cost of sales
Operating Profit- It takes into account all the operational costs like accounting fees and bank
charges
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Equation: Operating Profit= sales rev- the cost of sales- operating cost
Sales rev increasing or decreasing won't have an impact on operating costs unless the business aims
to reduce them
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It indicates how much dividend can be paid to
shareholders thus shareholders look at this amount to decide if they want to invest or not
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Businesses need to make
sure their cash flow is positive and nothing significant happens to disrupt it
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If a customer doesn’t pay for goods
supplied within a set period, say 60 days, this will harm the sales revenue coming into the
business during that period
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● Overproduction of goods
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● Not meeting sales targets
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Setting profit Objectives- Businesses want to see if they have increased their profit or not, thus they
will have to get different ways of measuring profits and compare them in different periods
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Profit margins-

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Net Profit Margins=

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Gross Profit Margins =

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Return on Capital =

NOTE: When the operating profit margin is very low, a business might set an objective of reducing
variable or fixed costs
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Objectives for Revenue and Costs
A business will analyse its revenue, costs and profits before setting an objective
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A business also
has to consider the quality of its products and their elasticity in demand
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Key Q's:
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What is the value of setting finance objectives?

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Difference between cash flow and profit
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What are the objectives for:

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What are the internal and external influences on financial objectives and
decisions?

Capital investment, revenue, costs, profit, cash flow, and capital structure

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