Author: Jim Riley Last updated: Sunday 23 September, 2012
Financial objectives - overview
From the first day of trading, a business should set itself financial objectives.
For a start-up, the relevant financial objective is likely to be focused initially on survival - i.e. not running out of cash.
After a while (hopefully sooner rather than later) the business aims to breakeven and then start generating a profit.
Even better would be to generate positive cash flows out of those profits. Medium-term financial objectives for the start-up might then also include making a return for the investors and growing the capital value of the business.
Importantly, those early financial objectives of the start-up never really disappear completely. The many well-established businesses that became insolvent in 2008-09 during the recession would certainly have given their all to have achieved survival and emerged intact from the economic downturn. The profit objective continues to be a vitally important aim for private sector businesses of all sizes.
However, as a business becomes well-established and its products and operations become more complex, the nature of its financial objectives changes.
Why set financial objectives? It is quite simply because the performance of a business is traditionally measured in financial terms.
Internal and external influences on financial objectives
The main internal and external influences which are likely to affect the financial objectives include:
The nature of business ownership has a significant impact on financial objectives. A venture capital investor would have quite a different approach to a long-standing family ownership.
As demonstrated by the Credit Crunch. The economic downturn forced many businesses to reappraise their financial objectives in favour of cost minimisation and maximising cash inflows and balances.
Significant changes in interest rates and exchange rates also have the potential to threaten the achievement of financial targets like ROCE.
Size and status of the business
E.g. start-ups and smaller businesses tend to focus on survival, breakeven and cash flow objectives. Quoted multinational businesses are much more focused on growing shareholder value
Competitive environment directly affects the achievability of financial objectives. E.g. cost minimisation may become essential if a competitor is able to grow market share because it is more efficient
Other functional objectives
Almost every other functional objective in a business has a financial dimension – which often brings the finance department into conflict with other functions.
Social and political change
Often an indirect impact. E.g. legislation on environmental emissions or waste disposal may force an business to increase investment in some areas, and cut costs in others
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