Financial Objectives, Cash Flow, Cash vs Profit

Setting Financial Objectives

• Financial targets are departmental goals set by managers to achieve corporate objectives, requiring them to be SMART (Specific, Measurable, Achievable, Relevant, Time-bound).
• Financial aims are broad goals, while financial objectives are specific, SMART targets to achieve those aims.
• Financial strategies are long-term/medium-term plans designed to achieve objectives at a senior management level.
• Financial tactics are short-term financial measures to meet immediate threats or opportunities.

Cash Flow

• Cash flow is the total cash flowing into a business (inflows) minus cash leaving (outflows) over time.
• Cash inflows include receipts from customers, loans, rent, and asset sales.
• Cash outflows include payments for raw materials, goods, equipment, loan repayments, and interest.

Cash vs Profit

• Cash is the money a business has to pay debts in the short term.
• Profit is the final result at the end of a financial period if revenue is greater than costs.
• Businesses may appear profitable but struggle with low cash, leading to insolvency if debts cannot be paid.
• Sales on credit count as immediate revenue but are not cash inflows until received.
• Payments for goods from suppliers show as a cost on accounts but are not cash outflows until paid.
• Purchased stock appears as an asset but ties up cash.
• Payments for non-current assets are cash outflows made to the supplier.
• Non-current assets are on the balance sheet, without impacting profit. Depreciation counts as a cost, without affecting cash outflow.
• Good cash flow is vital to pay debts and avoid bankruptcy or liquidation, regardless of profitability.

Revenue, Costs, and Profit Targets

• Sales growth and maximization involves better promotion and changing prices.
• Profit growth and maximization involves charging higher prices, generating higher sales, or minimizing costs.
• Cost minimization involves reducing raw material costs, wage levels, and rent to maximize profit margins or reduce prices for a cost leadership strategy.
• Cost leadership involves minimizing costs to charge low prices to differentiate the business and develop sustainable competitive advantage (Porter's Generic Strategies).

Cash Flow Objectives

• Cash flow objectives might include maintaining a minimum closing monthly cash balance.
• Cash flow objectives might include improving inflows.
• Cash flow objectives might include minimizing outflows.
• Cash flow objectives might include reducing reliance on bank overdrafts.
• Cash flow objectives might include spreading cash inflows and outflows evenly over the year.
• Cash flow objectives might include improving liquidity by holding less stock.
• Cash flow objectives might include improving credit terms with suppliers and customers.

Other Financial Targets

• Targets for investment/capital expenditure may be set on how much to spend on expansion, equipment, and non-current spending.
• Investment targets depend on financial position, profits, competitors' spending, and the economy.
• Shareholder targets exist, as shareholders assess a firm's success based on dividend’s.
• High dividend per share is the dividend payment to shareholders as part of the profit.
• High dividend yield is dividend compared to the market value of the share.
• Increase the share price as the company becomes more successful and people want to purchase its shares.
• High earnings per share is total profit dividend/number of shares.

Reasons for Setting Financial Ojectives

• Financial goals act as the department's focus for decision-making and effort.
• Financial goals can be used to evaluate the department's success or failure.
• Financial goals help improve staff coordination by giving teams and departments a common purpose and direction.
• Firms can analyse the reasons for their successes or failures through financial targets.
• Shareholders can assess whether the business will provide a worthwhile investment through financial targets.

Internal & External Influences

• Internal influences managerial risk taking, owner's views, human resources issues (Skills), legal struture, type of production, stock levels etc.
• External influences include the state of the economy, inflation, interest rates, political factors, competition, suppliers, and customers.

Financial Targets in Summary

• Financial targets ensure the department works towards corporate objectives.
• Financial targets motivate departments and measure their success.
• Financial targets help stakeholders understand the business.
• Firms have different targets based on their environment.
• Cash flow is vital in the short term, but profit is vital to firms in the long-term.

Understand financial objectives as SMART targets for achieving corporate aims. Learn about cash flow, including inflows and outflows, and differentiate between cash and profit in business finance. Explore financial strategies and tactics for effective management.