Financial Objectives

Financial objectives examples

Financial objectives are the goals or targets related to the financial performance of a business. They are the goals that enterprises set for success and growth.

There are six main types of financial objectives:

• Revenue objectives,

• Cost objectives,

• Profit objectives,

• Cash flow objectives,

• Investment objectives,

• Capital structure objectives.

Revenue objectives

Revenue objectives are the most common objectives used by all types of firms.

There are three types of revenue objectives:

1. Revenue growth (percentage or value). For example, aiming to grow total revenues by 30%, reaching £1 million in annual revenue.

2. Sales maximization. For example, maximizing total sales no matter whether they are profitable or not.

3. Market share. For example, growing market share to 40%.

Cost objectives

Cost objectives aim to simply minimize the costs without lowering the quality of a product or service. For example, cutting variable costs to £50 per unit.

Profit objectives

Profit objectives are typically supported by revenue and cost objectives. For example, when growing revenue and cutting costs an enterprise will generate a higher profit.

There are four types of profit objectives:

• Specific level of profit. For example, achieving an operating profit of £1 million.

• Rate of profitability. For example, achieving an operating profit margin of 15%.

• Profit maximisation. For example, maximising the total profit for the year.

• Exceed industry or market profit margin. For example, growing the gross or operating profit margin higher than the competitors.

Cash flow objectives

Cash flow objectives are typically used by small businesses and start-ups which are not yet profitable. The objectives focus on improving the cash flow.

This can be achieved by:

• Reducing borrowings,

• Minimising interest costs,

• Reducing inventory and credit sales,

• Reducing seasonal swings in cash flow.

Investment objectives

Investment objectives aim to increase the return on investment.

There are two types of investment objectives:

1. Level of capital expenditure. It is setting an absolute amount or percentage of revenues. For example, investing £1 million or 5% of revenues per year.

2. Return on investment. It is a target percentage of return. For example, ROCE (return on capital employed) of 20%. (See the article about financial ratios.)

Capital structure objectives

Capital structure objectives are related to how an enterprise is financed and how its capital is structured.

There are two types of capital structure objectives:

1. Higher equity. It is usually used by start-ups and companies which do not have to pay dividends.

2. Higher level of debt. It is used when interest rates are low and profits are high.

Personal financial objectives

Personal financial objectives are financial aims set by individuals rather than businesses.

For example:

• Creating a budget,

• Saving for short-term and long-term plans (trip, retirement, children),

• Paying off debts,

• Investing in the stock market,

• Starting an emergency fund (saving money for unpredicted expenses).

Setting financial objectives

There are some simple steps that will help you to set financial objectives:

1. Decide on what you are going to use the money for

Imagine that you set a financial goal and achieve it. You earned all the money you wanted. What now? Think about what you are going to do with the earned money. Always try to make your money work and earn. You can do it by for example further investments.

2. Categorise your financial goals

Segregate your financial goals regarding their length of time:

• Short-term financial goals (six months to five years).

• Mid-term financial goals (five to ten years).

• Long-term financial goals (more than ten years).

3. Set deadlines

Try to set a target date for each financial goal. For example, if you are going to retire in 25 years, make sure you save enough money by that time.

4. Prioritise your goals

It is impossible to achieve all your financial goals at the same time. Therefore, you should decide on which goal is the most important to you and which you need to achieve first. For example, if you want to save money for your child who is going to college next year and save money for your retirement, focus on the first goal first.

5. Know how much you have now and how much you want to have

Calculate how much money you possess at the moment and determine how much you still need to save. You can also think about how much time you have to achieve your financial goal and calculate the amount you need to save each month.

Purpose and benefits of setting financial aims

Here are some of the benefits of setting financial objectives:

It makes you aware of where you are heading - Owing to setting financial goals you are able to determine what you want to achieve and what success means to you.

It helps to determine how much you need to save - Imagine you have £800,000 now and by the end of the next year, you need to achieve double this amount. Thanks to setting a financial objective you can easily calculate how much money you still need to save. You can also calculate how much to save each week or each month.

It allows you to follow an appropriate strategy- Depending on how big your financial goal is, you might need to find and follow an appropriate strategy. Having set your financial objective, you can work out a strategy right for you.

It helps to shape your everyday choices - If you are aware that next month you will have to pay rent for your flat and you have barely the amount needed for the rent, you are aware that you need to save and even earn money. In such a situation, you can for example give a miss to another drink at a pub or take one more shift at work.

It creates a sense of achievement and awareness - Knowing your financial objectives and being aware of how to achieve them also have a positive psychological and intellectual impact. Firstly, achieving your goal automatically makes you feel fulfilled and secondly, the entire process makes you more aware of how money is generated and how much effort needs to be put there.

Disadvantages of setting financial objectives

The disadvantages of setting financial objectives include:

• It might prevent you from spending money - Having set financial goals and aiming to follow them, it is typical to avoid additional and unexpected expenses. However, sometimes it is essential to spend more money in order to increase sales and generate higher profits.

• Failing to achieve a set goal might make you feel disappointed - If someone sets a goal, they aim to achieve it. However, it is not always possible to be successful. You should bear in mind that some plans fall apart and it does not have to be your fault.

Influences on financial objectives

There are two types of influences that can impact financial objectives: internal and external.

Financial Objectives: Internal influences

Size and status of an enterprise. A lot depends on how big the business is. For example, small companies and start-ups tend to focus on survival, rather than on setting ambitious financial objectives, whereas huge companies are typically able to focus on growing their profits.

Business ownership. It makes a huge difference whether an enterprise is owned for example by an individual or by the government. An individual has more deciding power over their company and therefore bigger possibilities than if a company was owned by the government.

Other functional objectives. Most companies consist of various departments. These departments tend not to agree with one another and consequently limit their ability to set financial objectives.

Financial Objectives: External influences

Competitors. The competitive environment has an enormous impact on each business including its financial objectives. For example, if a firm’s competitors grow market share, the firm needs to catch up with them and consequently give a miss to their financial goals.

Economy. An economic downturn may hold an enterprise back from achieving its financial objectives. Even though they have set such objectives, their plan might easily fall apart.

Social change. Trends tend to change and people tend to drop out using some goods and start using different ones instead. Nowadays there are many factors that have an impact on society. Therefore, a company that has been successfully achieving its financial goals might be easily disabled from continuing to do it because of a change in consumer habits.

Political change. Similarly to social change, politics may hold a company back from achieving its set financial objectives. For example, they might launch new taxes charging a company’s account.