Financial Objectives

4 Key excerpts on "Financial Objectives"

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  eBook - ePub

  Naked Finance

  Business Finance Pure and Simple

  • David Meckin(Author)
  • 2011(Publication Date)
  • Nicholas Brealey Publishing

    (Publisher)

  Part OneSETTING Financial Objectives

  To manage the finances of a businessyou need to know where you are going Passage contains an image

  2 IS IT ALL ABOUT PROFIT?

  Every day managers are bombarded by numbers: sales, margins, salaries, stock levels, profit, cash, and share prices – the list is endless. The situation is not helped by the fact that the mantra from on high regularly changes from ‘increase sales’ to ‘cut costs,’ ‘reduce stock levels,’ ‘improve cash flow,’ ‘cut staff,’ or ‘increase profit.’ If only people would make up their minds! How can you be expected to make sound managerial decisions when you’re not given clear guidance about what the business is trying to achieve?

  You will be relieved to hear that the primary financial objective of most businesses rarely changes. What does change is how they try to achieve that objective. Once you understand what the goal is, the various methods available for attaining that goal will make a lot more sense. In this chapter we going to look at the role of profit in business and also introduce another concept regularly talked about, cash flow.

  What does a business need to survive?

  Business is all about trade, and trade can be defined as ‘the activities of buying and selling.’ Since buying activities involve expenditure while selling activities involve revenue, it follows that any entity concerned with the management of revenue and expenditure can be regarded as a business.

  Whatever your business, how can you ensure it will survive? Unfortunately, many businesses close down within their first year of operation. This is not necessarily because their products are of poor quality or their customer service is lacking. The most common reason is poor financial management. There are two prerequisites for survival: sound management of the business itself and sound management of its finances. If either of these is lacking, the business will have a very short life.

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  Financial Management NQF4 SB

  TVET FIRST

  • B Brown(Author)
  • 2013(Publication Date)
  • Macmillan

    (Publisher)

  Topic 2 Financial planning and control functions for a small business 66 Module 5: Preparing a business plan Preparing a business plan When you have completed this Module, you should be able to: • identify various components that should be included in a business plan that will be submitted to a financial institution; • provide examples from a successful organisation; and • compile and construct a business plan in a format acceptable to a financial institution. Unit 5 .1: The components of a business plan In Topic 1, we indicated that a good business plan should include the following: • your short-term and long-term objectives; • a review of the marketplace in which your business operates; • a summary of your competitors; • your perception of how your products or services meet the needs of the marketplace in the presence of the existing competitors; • how you intend to promote your products or services; • how you intend to recruit and retain the right people to make your business work; and • your anticipated financial projections for the business. Below we examine each of these factors in further detail. Business objectives In the workplace Business objectives have different titles in different organisations and can be called: • a mission or vision when they relate to long-term objectives; • goals or targets for short-term objectives; and • tasks for immediate objectives. Business objectives are statements indicating what you intend to achieve in your first or next trading year. Therefore, your objectives will probably reflect the following: • the number of products you intend to produce and sell; • the turnover ; and • the level of profit you expect to achieve. Words & Terms turnover: total sales, or gross revenue. Turnover can also refer to the number of times an event happens in a given year, such as the number of times the value of creditors is paid in a year is the creditors turnover. Words & Terms turnover: total sales, or gross revenue.

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  Hospitality Management Accounting

  • Martin G. Jagels(Author)
  • 2006(Publication Date)
  • Wiley

    (Publisher)

  2. To decide on the sources of needed capital and to obtain the funds required by the firm to meet its goals. 3. To allocate these funds effectively to the various assets of the company, again with the company’s goals in mind. Only with clearly stated goals can an organization effectively manage its finances. Without them, a business operates without a plan. In a small owner- operated enterprise, a goal may be expressed in simple terms, such as that the owner wishes to make enough net income in the first 11 months of the year to take a vacation in the twelfth month. In a large or chain operation, goals would be established in a much more formal way by the board of directors. Goals are frequently expressed in monetary terms. Some of these financially measurable goals are discussed next. PROFIT MAXIMIZATION Profit maximization, or making the most amount of money in the shortest pos- sible time, is one of the commonly considered objectives or goals of a com- pany. It is argued that the total amount of profit or net income is not a realistic measure, since one can always sell more shares and invest the proceeds in mar- ketable securities, thus increasing total net income. Because of this, maximiza- tion of earnings per share may be a better way to measure net income. In either case, however, the time element is important because of the time value of money. Most people would agree that $100,000 net income in the first year and noth- ing in each of the following 9 years is preferable to $10,000 per year for each O B J E C T I V E S O F F I N A N C I A L M A N A G E M E N T 555 of 10 years. The reason is that the entire $100,000 could be invested in the first year and continues to accumulate interest until the end of the tenth year, thus maximizing net income. However, one of the problems with profit maximization as a goal is that it may ignore the possible risks of an investment.

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  Start-Up Guide for the Technopreneur

  Financial Planning, Decision Making, and Negotiating from Incubation to Exit

  • David Shelters(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  You can take micro-level actions in preparing the auto for the long trip as well. Leaving the SUV at home and taking the very fuel-efficient sedan (strong value proposition) would certainly be advantageous, although possibly less comfortable. A pretrip tune-up (effective operational plan) and cleaning the car (effective marketing plan) can both add to the fuel efficiency of the car. Proper air pressure in the tires (effective management team) and adjusting the mirrors (bringing along a good investor for the ride) should make for a more pleasant and less eventful ride. Topping your brake fluid and power steering fluid (maintaining control) is certainly advisable before a long trip as well.

  As in travel plans, there are many considerations in financial plans. Establishing Financial Objectives will facilitate the execution of a financial plan and keep you on the course plotted. Next we turn to the basis for such Financial Objectives.

  Financial Objectives

  There are five primary bases for establishing Financial Objectives:

  1. Burn rate coverage. The first financial objective for any new business is to have the ability to internally finance the minimum expense requirements of your business as soon as possible. This leads to a priceless source of peace of mind and the best source of negotiating leverage and effective control. The concept and importance of burn rate was presented in our discussion of KYI #3 in Chapter 2 .
  2. Revenues and profitability. These are the most obvious bases of Financial Objectives. These numbers have already been calculated and presented in your pro forma financial statements. They directly address the primary objective of making exceptional returns on investments. The remaining three bases for Financial Objectives are associated with effective and efficient fundraising and can be quantified utilizing measurement tools to be presented in the next section.
  3. Minimizing equity dilution. Minimizing equity dilution is a means to maximizing ROI for the founding partners.
  4. Optimal selection of funding or financing options

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