Financial Objectives

A financial objective is a goal set by an enterprise for its financial success and growth. These goals relate to the financial performance of the business and can vary over time depending on the needs and requirements of the business and the changing corporate landscape. In this article, we debunk the meaning of financial objectives in business, highlighting their significance, types, and benefits.

What is a financial objective?

A financial objective means a goal or target that a business sets for financial growth and success. The financial objectives of companies vary depending on different factors like the basket of products and services they offer, the structure of the business, their current requirements, etc. Typically, financial objectives focus on increasing the revenue of a business or boosting its sales. Businesses can have a list of multiple financial objectives at once. These objectives act as a measure of success for the business and help focus business operations towards given targets. In a nutshell, financial objectives are measurable goals that help guide business operations, make investment decisions, and drive long-term success.

It is important to note that businesses can change and alter their financial objectives as and when necessary. Once certain financial objectives are met, new ones can be set to replace them. Financial objectives may also be revised if the business wants to change its strategy or focus on other areas of operations.

Example of financial objective

As mentioned earlier, the meaning of financial objective is a goal related to the financial performance of the business. These goals are set by companies to achieve growth and success. For instance, ABS is a mining company with strong financials but also a significant amount of debt from the initial start-up expenses. In the initial years, the company secured multiple loans to acquire costly mining equipment and hire experienced staffers. In keeping with this, ABS sets the following financial objectives for the coming fiscal year:

• Lower debt by 10%-15% to improve the debt-to-equity ratio.

• Implement efficient drilling processes to boost profit margins.

• Boost net revenue by selling ores to an overseas buyer for a 25% premium.

Why are financial objectives important?

Now that you know what financial objectives are, it is time to understand why setting financial objectives is important. Here’s why companies need to set clear financial objectives:

1. Provide direction to operations

Setting definite financial objectives helps create a clear purpose for all the employees and management members. In other words, everyone in the company can work towards achieving clear goals and ensuring better coordination.

2. Improve resource allocation

Allocating resources becomes easier once you have clearly set goals in place. Company management will know exactly how to direct funds and resources according to the prioritised list of its financial objectives.

3. Helps with long-term planning

Setting financial objectives makes it easier to plan the future of the company. It essentially helps the company visualise and plot the course of where it's heading.

4. Provides a relevant measure of success

Financial objectives act as a measure of success. Achieving set objectives can help managers measure how successfully the company is operating and if any changes in operations are required.

Types of financial objective

Companies can set various types of financial objectives depending on their priorities and requirements. Here’s a comprehensive overview of the different kinds of financial objectives:

1. Revenue objectives

Revenue objectives are some of the most common types of financial objectives set by businesses. Among the different revenue objectives set by companies, the three most common ones are sales maximisation, revenue growth, and boosting market share. The first one refers to maximising sales in the market, the second deals with growing the revenue by a certain percentage to reach a certain total value, and the third is capturing more market share.

2. Cost objectives

Cost objectives of a company cover the aims of lowering the costs of the company without compromising on product or service quality. This objective can be linked to unit costs and target better efficiency measures to boost labour productivity. In other words, it creates more goods with the same amount of labour, ensuring optimised use of resources to bring down costs. Lowering costs can help the business boost its profit margins.

3. Profit objectives

Companies that have profit objectives want to boost their overall profits. Profit objectives are generally accompanied by revenue and cost objectives. Companies can aim to achieve a rise in profit in absolute terms or simply boost their rate of profitability by achieving a certain profit margin. Some may simply focus on profit maximisation at all costs, while others may want to exceed industry or market standards of profit by generating higher gross profit than their competitors.

4. Cash flow objectives

Cash flow refers to the net cash transferred in and out of a business. A positive cash flow is essential to attain any of the other objectives. Cash flow objectives are common among small businesses and start-ups that are not yet profitable. To boost cash flow, businesses may aim to reduce borrowings, reduce inventory and cash tied up in receivables, and boost cash flow to profit percentages.

5. Capital structure objectives

Capital structure of a business refers to the mix of different funding sources, including equity and debt, used to finance its operations. In other words, it relates to how much of the company’s capital comes from equity shares and how much comes from debt financing. Businesses generally have two primary capital structure objectives vis-a-vis the gearing ratio and the debt-to-equity ratio.

6. Return on investment objectives

These financial objectives correlate to the return the business makes on its investment. The return on investment objective is usually set as a percentage of return that’s calculated by dividing the operating profit by the amount of capital invested.

Often-encountered financial objectives

While companies are varied and have different goals and visions, most operate on the basis of a few common types of financial objectives. These common financial objectives are listed below:

1. Increasing revenue

Most businesses operate with the financial objective of boosting revenue. Revenue can be increased by increasing sales. Usually, businesses focus on increasing revenue by a certain percentage rather than an absolute amount in Rupees. Additionally, this financial objective is also time-bound. In other words, companies target a certain percentage of revenue growth within a set period of time. For instance, XYZ is a garment manufacturing company that targets a revenue growth of 10% over the current financial year. If successful, it can aim for a higher growth rate next year.

2. Increasing profit margins

Another common financial objective is boosting profit margins from sales. Profit margins refer to how much profit is made on the sale of each product post expense deduction. Businesses can boost profit margins by reducing their production expenses. For instance, company XYZ can build relationships with suppliers to lower the cost of procuring raw materials like cotton and silk for its garments. It may also consider direct-to-consumer sales channels like online stores instead of physical ones to cut overhead costs. If business expenses cannot be reduced further, businesses can choose to increase the selling price of their products to boost profit margins. However, it is always advisable to revise pricing strategies after considering the demand in the market and existing competition.

3. Earning a return on investments

Return on investments is a long-term objective for businesses since investments generally take some time to generate returns. Businesses usually invest in either physical properties and equipment or non-physical assets like stocks, bonds, etc. Return on the former means that the revenue from these equipment and buildings justifies their purchase expenses. For the latter, return on investment is gauged by the interest and capital gains earnings.

4. Financial stability

This financial objective is generally set when businesses enter a survival mode. Here, the aim is not to boost revenue or profits but ensure financial stability to weather the tough times and remain afloat. In essence, this financial objective is simply economic survival and recovering. Most companies aiming for financial stability often turn to a strategy called retrenching whereby they try to curb expenses to preserve profits. This is more of a short-term objective. Once the company has recovered, this financial objective is replaced by a revenue or profit-motivated one.

Benefits of setting financial objectives

Setting clear and time-bound financial objectives offers several advantages for businesses. Definite financial objectives act as milestones for the company, helping it understand what it wants to achieve. Once the goals are clear, the efforts of the entire team can be focused on achieving them. Designing operational strategies becomes easier once businesses have their financial objectives chalked out. Whether it be investment decisions, expansion plans, or debt reduction, clear set goals help businesses curate an appropriate strategy for the same. In other words, financial objectives can be used to support decision-making throughout the enterprise.

Additionally, financial objectives can be used to measure the success of the company. Let’s assume company ABC set a financial objective to increase its net profits by 10% last year. It fulfilled this objective by opting for cheaper raw materials and improving production efficiency. This rise in net profits means the company has more cash to reinvest in the business, invest in other assets, etc. This signals that ABC is a profitable venture, strengthening investor confidence.

Financial objectives relating to cash flow objectives help adopt strategies to maintain optimum cash flows and minimise the chances of business failure. Additionally, the financial objectives of the company help stakeholders understand the priorities of the business and make sense of their business decisions.

How to set financial objectives?

Businesses can implement the following steps to set clear and achievable financial objectives:

1. Specify your financial objectives

You need to start by setting specific financial objectives for your business, like increasing revenue by 12% or reducing expenses by 18%. Having vague goals in place does not offer much direction. Specific and measurable goals help you stay motivated and track your progress over time.

2. Set deadlines

Setting specific goals is all about timing your objectives. If you aim to increase revenue, set a deadline for the same. In this case, you financial objective may look like: ‘increase revenue by 4% over the next quarter’ or ‘increase revenue by 12% Y-o-Y’.

3. Create an action plan

Once you have your financial objectives outlined and timed, you must start drafting a plan of action. This plan helps ensure that necessary action is taken to achieve the desired outcome. For instance, if your financial objective is increasing revenue by 12% over the next year, create a plan of action for boosting sales, funding marketing campaigns, reducing costs, etc. Essentially, the action plan helps you figure out ‘how’ you are going to achieve the set goal.

4. Set a budget

Tracking your expenses and having a definite budget in place is crucial when outlining the financial objectives of your business. Knowing where your funds are going will help you better allocate these funds. Budgeting expenses also helps in efficiently using funds for the purpose of achieving financial goals as well as understanding how much money is needed to achieve a particular financial objective.

5. Adjust when needed

Business owners must remember that financial objectives are not set in stone. Remaining flexible is key to a sound strategy. You should avoid getting caught up in rigid and predetermined goals. Remember that your financial objectives can require adjusting or changes due to unexpected circumstances. Incorporating flexibility into financial objective planning is crucial for businesses to remain competitive in the present landscape.

Financial objectives for individuals

Apart from businesses and corporations, individuals can also set financial objectives. Individuals can identify and set personal finance goals and objectives. For instance, you can set financial objectives to save for a short-term milestone like funding a foreign trip or a long-term one like planning for your retirement. Identifying financial objectives helps you draft comprehensive financial plans to achieve these objectives. Some of the most common personal finance objectives include drafting a budget, creating an emergency fund, paying off debt, and investing in mutual funds and stocks.

Disadvantages of setting financial objectives

Financial objectives have their benefits but also certain drawbacks:

1. Inflexibility

Having set financial goals often means being tied to a definite strategy and approach. This can cause stakeholders to miss out on signs that their strategy or other goals need revisions due to changes in various external factors. In other words, course revision may be difficult if your financial objectives are too rigidly set. Additionally, businesses may wish to sidestep expenses to achieve certain financial objectives. However, additional expenses like investment in more sophisticated machinery may sometimes be needed to meet financial objectives like increased revenue and profits.

2. Often short-term

Financial objectives are often set for the short-term duration, like rising revenue in the given fiscal year or increasing net profit over the next quarter. This emphasis on the short term can cause the company to lose sight of its long-term operations.

3. Challenging process

Managing the financial objectives and goals of a company is a challenging task for business owners and management. Goals are often relative, changeable, and unstable due to the constantly changing corporate environment. It often becomes a challenge for managers to balance conflicting and competing priorities of the business.

The bottom line

Understanding the meaning of financial objectives is crucial for both businesses and individuals. In the context of businesses, financial objectives are financial targets set by the company like boosting revenue or enhancing profits to help promote its growth and success. In the context of individuals, financial objectives refer to personal finance goals like building a contingency fund or planning for your retirement. Setting financial objectives can be beneficial as they help provide direction to the operation of an enterprise and gauge its success.

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