Setting Financial Objectives (AQA A Level Business): Revision Note

Financial decisions and their relationship to other business functions

• The role of finance is to manage the money that flows in and out of the business—budgeting, forecasting, controlling costs, and funding growth

• Every financial decision has a direct impact on other departments—and they, in turn, influence financial planning

• Finance provides the fuel that powers the business—but it needs the:

  • Creativity of marketing

  • The efficiency of operations

  • The support of HR to ensure resources are used wisely and goals are met

The relationship between finance and other business functions

The value of setting financial objectives

• A financial objective is a clear, measurable target for a firm’s financial performance

  • It should provide managers something concrete to aim for and against which to judge their progress over time

• Key financial objectives include:

  • Return on investment (ROI)

  • Revenue, cost and profit objectives

  • Cash flow objectives

Return on investment

• Return on investment (ROI) is a measure of how much net profit a capital expenditure investment generates relative to the amount originally invested

• It is expressed as a percentage and calculated using the formula

Reasons for setting ROI objectives

1. Effective allocation of capital expenditure

   • Capital expenditure competes for scarce funds

   • Measuring its ROI helps managers to compare projects and chose the best option in financial terms

2. Shareholder and lender confidence

   • Achieving a good return on capital expenditure investments signals that management can make good choices

   • This supports the share price, attracts investors and may make lenders more willing to grant loans

Revenue, costs and profit objectives

Revenue objectives

• Revenue is income a business earns from selling its goods or services

• A revenue objective is a target for the money a firm wants to earn from sales within a period

  • Examples may include 'Achieve sales of £50 million in the next financial year' or 'Grow revenue by 8 % year-on-year'

Reasons for setting revenue objectives

Difficulties in setting revenue objectives

• Demand uncertainty

  • Predicting how many units customers will actually buy can be difficult

• Competitive reactions

  • Rivals may reduce prices or launch substitutes, impacting the level of sales

• Cost Inflation and supply constraints

  • Even if customers want more, the firm may struggle to produce enough (or must raise prices, risking the volume of sales

Costs objectives

• A cost objective is a clear target that a business sets for how much it wants (or is allowed) to spend over a period

• Meeting cost objectives can protect business profits and is an important way to keep prices competitive

• Cost objectives could focus on reducing costs

  • E.g. 'Cut operating costs by 10 % next year'

• Alternatively they may focus on cost minimisation

  • E.g. 'Keep unit cost below £2 per product'

Why businesses set cost objectives

Difficulties in setting costs objectives

• Volatile supply prices

  • A sudden increase in the cost of a major raw material can make cost objectives unachievable.

• Over-aggressive cost reduction

  • Cutting expenditure too much can undermine product quality or customer service, harming a business's long-term performance

  • Repeated rounds of redundancies can reduce staff motivation and affect future recruitment and productivity

• External shocks and regulatory change

  • New tariffs, taxes, or legal changes can add costs that are outside of managers' direct control

Profit objectives

• A profit objective is a target for the amount of profit a business wants to earn over a given period

• It focuses on the bottom line—the money left after all costs have been paid

How profit objectives are expressed

Why businesses set profit objectives

Difficulties in setting profit objectives

• Volatile raw material costs

  • A key raw material can suddenly increase in price, reducing profit margins overnight

• Intense price competition

  • Cutting prices to defend market share can erode profits faster than costs can be reduced

• Currency swings

  • Exchange rate movements can significantly impact profit for businesses that trade overseas

• Regulations and tariffs

  • Fines, product recalls or new tariffs can wipe out expected profits

Cash flow objectives

• Cash flow is the movement of money into and out of a business over a period of time

  • It shows how much cash is available to pay bills, wages, and other expenses, and is a key indicator of a business’s short-term financial health

• A cash flow objective is a specific target that a business sets for the amount and timing of cash flowing into and out of the organisation over a period

• These objective focus on liquidity

  • A measure of whether the business has enough ready money to pay suppliers, wages and lenders when due

Why firms set cash flow objectives

1. Fund investment without extra borrowing

   • Netflix's objective is to ensure it has free cash flow of $8 billion to finance new content

2. Strengthen credit rating

   • Disney increased its cash flow by 75% in 2024, helping to repay debt taken on during the pandemic.

3. Spot funding gaps early

   • Amazon’s cash flow increased in 2025 after managers were instructed to reduce their spending to offset heavy capital investment

Difficulties meeting cash flow objectives