Financial Objectives: what are they, who uses them, & why?

Every organization has goals. In a competitive market, goals are a necessity for survival. But not all objectives are alike. One company objective may be to minimize layoffs during economic downturn. Another might be to open a store in a prestigious location. Some companies even set goals to get Super Bowl ads! These are examples of non-financial objectives. Financial objectives, on the other hand, are usually more precise — they focus on numbers.

Definition of Financial Objectives

Financial objectives are company goals that use specific, actionable, and realizable target metrics, or key performance indicators (KPIs), to guide all departments of the organization. Examples include target sales, asset acquisition, debt pay-down, target stock price, cost controls, and profit. Financial objectives are generally good for a company, but they can have a negative impact on employees by introducing unrealistic expectations into vulnerable departments.

Examples of Financial Objectives

Financial objectives are as diverse as financial metrics themselves, but some common ones include profit, sales (revenue), return on assets ration, gross margin, and return on investment. Here’s a more complete list of financial metrics and their definitions:

  • P&L Metrics
    • Sales (revenue) target – top line target for the company
    • Cost of Sales (CoS) target – direct product or service costs for the company
    • Gross margin – Sales minus CoS
    • Staff cost target – the price of salaries
    • Operating expenses target – all costs not directly related to the product or service (office supplies, staff costs)
    • Operating profit target – profit after operating expenses
    • Interest expense target – the cost of borrowing money to pay for operations
    • Depreciation target – the amount of physical fixed asset value currently being paid for
    • Amortization target – the amount of IP fixed asset value currently being paid for
    • Taxable base target – the profit on which taxes are calculated
    • Tax obligation target – the amount of taxes to pay
    • Net profit target – profit after taxes
    • Net profit margins target – net profit/revenue
  • Balance Sheet Metrics
    • Total assets target – a total assets target (this one is uncommon)
    • Long term assets target – target for assets that depreciate over a number of years
    • Current assets target – assets that will be liquidated, or could reasonably be liquidated, within 1 year (cash is also a current asset, and it obviously doesn’t need to be liquidated)
    • Non-cash current assets target – all current assets but cash (helps put the focus on operating activities)
    • Total liabilities target – a total liabilities target
    • Long term liabilities (debt) target – target for liabilities due in more than 1 year
    • Current liabilities target – liabilities due within a year
    • Total equity target – target for shareholder equity (this one is uncommon)
    • Retained earnings target – same as net profit
    • Total liabilities + equity target – total asset-funding items target, same as total assets
  • Cash Flow Statement Metrics
    • Cash from Operating Activities target – cash from all things operations
    • Cash from Financing Activities target – cash from debt and equity events
    • Cash from Investing Activities target – cash from the purchase or sale of assets
    • Operating Cash Flow ratio target (CFO/Sales) – a ratio metric
    • Asset Efficiency ratio target (CFO/Total Assets) – a ratio metric
    • Current Liability Coverage ratio (CFO/Current Liabilities) – a ratio metric

Examples of Non-Financial Objectives

Financials aren’t everything, and sometimes they only make sense when combined with strategic, non-financial objectives. Non-financial objectives consist of internal and external goals that a company uses to guide its departments down the same path towards growth. Examples include:

Internal non-financial objectives include:

  • Cost savings
  • Employee turnover rate
  • Process optimization
  • Organizational optimization
  • Data organization
  • Learning and development
  • Team building

External non-financial objectives include:

  • Obtaining new markets
  • Consolidating existing markets
  • Controlling existing markets
  • Securing a board of directors
  • Gauging investor interest in private placements and stock pricing (in an IPO)
  • Building better bank relationships
  • Building better investor relationships

Internal Influences on Financial Objectives

Financial objectives concretize where an organization wants to go, but the vision for that direction comes from an individual. Internal influences for financial objectives can be defined as the catalysts for the setting of goals for reasons not explicitly driven by market forces. In most cases, the internal influencer is the owner or management team.

Management teams decide on financial objectives based on what they think will best help bring the company together behind a common goal. This does not necessarily mean the company needs that goal in order to survive or grow, but it does mean the company will reorganize itself around obtaining that goal. In this way, financial goals have a “molding” effect on the organization.

This is advantageous for a number of reasons. It helps the company identify its strengths and weaknesses, and shows how well the company can adjust to tackle new opportunities in the market. The internal influencer for financial objectives is often the management team’s efforts to reorient the company in a new direction.

That said, in order for the goal to work, it must be specific, actionable, and realizable. I heard of a small development company with revenues of about $1,000,000 that wanted to set a financial goal of doubling their revenue. This was a bad financial goal. It was specific — which means it was clear enough for everyone to understand. It was actionable — meaning every department knew what actions they could take in order to work towards the goal. However, it was not realizable — how could a company, whose revenues are directly related to the time its employees work, double it’s sales without additional help? It couldn’t, and it didn’t reach this goal because it was not realizable.

External Influences on Financial Objectives

Financial objectives concretize where a company wants to go, and the vision for that direction most often comes from market forces. External influences on financial objectives can be defined as demands of customers and industry trends.

External influences are far more important than internal influences, and they’re much more common. I worked for a marketplace-style startup who set a goal of increasing its revenue by 50% in one year. I won’t use exact numbers, but for the sake of the example, let’s assume they wanted to go from 150M revenue to 200M revenue.

The reasoning behind this decision was that a competitor was moving into an adjacent place in the market. We had tried for years to move into that space, but due to organizational and hierarchical conflicts, as well as conflicts in departmental priorities, we couldn’t seem to make the move.

However, when the organization had this specific, actionable, and realizable goal of increasing sales by 50%, as well as the market goal of moving into the new space, we were able to achieve it in one year. Moral of the story? Financial objectives work.

Advantages and Disadvantages of Financial Objectives

Financial objectives work. They’re amazing organizational tools that help the company get behind a common goal. However, they do have their disadvantages. In many cases, they wreak havoc on vulnerable teams, and can hurt a company’s culture by amplifying existing issues. Let’s look at advantages and disadvantages closer.

Advantages of Financial Objectives

In short, the core advantage of financial objectives is their ability to unify an organization’s departments around a common goal. When companies reach a certain size, it’s difficult to get everyone working on the same page. By setting company-wide financial objectives, companies are able to unify their teams.

Others advantages include:

  1. Create benchmarks for performance reviews
  2. Identify weak points in the company’s value chain
  3. Shift the focus to results rather than politics or favoritism
  4. Help make tough decisions about staff

Disadvantages of Financial Objectives

The biggest disadvantage of financial objectives is their tendency to put unbalanced pressure on some departments. Since financial goals usually hinge on a few departments’ performance, these departments often bear the brunt of pressure from the whole organization. For example, if the financial goal is revenues, the sales and marketing teams get hit hardest. When the financial goal is better working capital, account executives get hit the hardest.

Other disadvantages include:

  1. Employee turnover due to high performance pressure
  2. Due to this pressure, vulnerable teams may engage in unethical behavior
  3. Other than sales, difficulty for all teams to understand financial goals
  4. They can create tunnel vision and prevent teams from catching other opportunities
  5. Employees may resent a goal if they believe it moves the company in the wrong direction
  6. Goals that are borderline realizable may demotivate teams, since the fear of failure is often stronger than the desire for success

Conclusion

Financial objectives are effective tools for organizations. We can summarize them by answering the following four questions.

What are financial objectives? Financial objectives are company goals that use specific, actionable, and realizable target metrics, or key performance indicators (KPIs), to guide all departments of the organization.

Who uses them? NGOs and non-profits use financial objective, but they are most common in profit-seeking companies.

Why? Financial objectives allow organizations to unite their departments around a common goal.

Does it work? As long as financial objectives are specific, actionable, and realizable, they work. That said, there is fallout. In many cases, teams with the strongest role in achieving the goal come under immense pressure to deliver from the rest of the organization. Sales teams are the most common example.