2. Setting Financial Objectives Flashcards
Benefits of Financial Objectives (x4)
Provide direction
Measure financial performance
Support decision making
Motivate employees and teams
Return on Investment
Allows a business to calculate the efficiency of a project by comparing the amount invested with the amount returned.
Calculate Return on Investment
(Profit from investment) ÷ Investment cost) × 100
Long Term Funding
A business may use long-term funding targets as a financial objective. Setting targets to reduce long-term funding from debt can protect a business if there is an increase in interest rates.
Calculate Revenue
Quantity of goods sold x selling price per item.
Calculate Cost
Fixed costs + variable costs.
Cash Flow Objectives
Cash flow compares cash inflows and cash outflows to ensure a business always has enough cash to meet its short-term debts.
Investment Objectives
Investment objectives cover the total expenditure planned by a business to develop capital projects
Capital Structure Objectives
Capital structure targets focus on the proportion of capital received from different sources of finance.
Impact of Overall Business Objectives on Financial Objectives
Overall business objectives must be considered when setting financial objectives as finance objectives must support the business’ overall aim.
Impact of Different Departments on Financial Objectives
The objectives of other departments must be considered when setting financial objectives as all departments must be working towards the same overall aim.
Impact of Shareholders on Financial Objectives
The actions of shareholders must be considered when setting financial objectives as shareholders need to be satisfied.
Impact of Competitors on Financial Objectives
The presence of competitors must be considered when setting financial objectives as competitors can affect demand and therefore revenue.
