Financial Objectives: What They Are and Why They Are Important
Financial planning for a business involves many elements and is essential for a business's success. Creating financial objectives is one of the most important parts of this process. Businesses should know what their financial goals are in order to properly manage their money and track their progress. In this article, we discuss what an objective of finance is, why it is important and explain some of the most common financial objectives.
What is an objective of finance?
An objective of finance, or financial objective, is a goal that businesses set for success and growth. There are many different types of financial objectives, and which ones a business sets may depend on what type of products and services it offers, how it operates and what its current needs are. Financial objectives typically focus on increasing a business's profits or sales, but they may also focus on investments and economic stability. Financial objectives are often measurable goals that businesses can track and reach. These objectives typically focus on long-term success.
A business can change its financial objective as often as it needs. Once a business meets its current financial objective, it can set a new one. Businesses may also change their objectives if they want to focus on a different strategy or have other areas that need attention. It is also possible to have multiple financial objectives at once.
Why are financial objectives important?
Financial objectives are important because they help you make a plan to improve your business. With financial objectives, you can track your progress and see whether you have met your objectives within the time frame you set.
Creating financial objectives is an especially important part of building a new business or making substantial changes to an existing business. These goals are something to work toward, and they influence how a company operates and what decisions it makes.
Common financial objectives
Most companies focus on financial objectives to increase profits and growth, but some objectives are more specific and have other goals. Here are four common financial objectives:
This is the most basic financial objective for any business because the main goal of most businesses is to increase sales to bring in more revenue. This is what makes businesses successful and allows them to continue growing. When setting this financial objective, businesses typically focus on percentages. Rather than determining a target dollar amount to reach, a business determines how much it wants to increase its revenue by within a set period of time.
Businesses can change this objective for each new period. For example, a business may set a goal of increasing revenue by 15% in one year. If this is successful and the business sees a lot of growth, it may set a higher goal of a 20% revenue increase for the next year.
Read more: How To Increase Revenue
Increasing profit margins
Another common objective of finance is to increase profit margins from sales. Profit margins relate to how much is made on each sale after considering the expenses, while revenue is the general amount of profit that a company makes. Increasing profit margins still focuses on improving the success of the business and making it more profitable overall, but it uses different means than the objective of increasing revenue. However, these objectives may overlap because increasing profit margins also contributes to increasing revenue.
A business can usually increase profit margins by lowering its expenses. It accomplishes this by building relationships with suppliers or streamlining operations. If a business's expenses are already as low as possible and it still sets the objective of increasing profit margins, then the next option is to raise the cost of the product or service.
Read more: How To Analyze Profit Margin Results
Earning a return on investments
This objective is typically the most long term out of any financial objective. Investments can take time to see a return, sometimes several years, so this can be a good objective to set in addition to short-term goals.
There are two main types of investments that businesses make. The first are investments made in physical property and equipment. These investments include buildings purchased for company use or equipment purchased to use in product creation or to increase productivity. When creating an objective to make a return on these investments, companies make sure that the revenue generated by these investments is great enough to justify the purchase cost.
The second type of investments are those with no physical property involved, like stocks, bonds or other assets. The return on these investments is determined by interest and capital gains. The goal with these investments is to make a profit, but companies also determine whether these investments were worth it by how much profit they make. If they could have made a better investment that is more profitable, they may reconsider the investment.
Read more: How to Calculate ROI: A Guide to Calculating Return On Investment
This financial objective is not as common and is only used when necessary for the business to survive. Rather than increasing revenue or making a business more successful, this objective helps preserve a business throughout a challenging time. Occasionally, businesses may have to focus on economic survival as opposed to profits. The goal of this objective is to prevent profits from further decline and maintain the brand or image, and companies typically use a marketing technique called retrenching to accomplish this. Retrenching involves reducing costs or spending in response to economic difficulty.
The objective of financial stability works to ensure that the business has enough money to meet its obligations and that it can recover in the future. Some specific ways to accomplish this goal include collecting on outstanding debts on time, paying off debts in full and keeping income levels consistent. This objective should not be as long term as other objectives, and once companies recover from financial strain, they can shift their objectives to focus on growth and revenue again.
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