setting-financial-objectives as

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Exam code:7131

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
- efficiency of operations
- support of human resources (HR) to ensure resources are used wisely and goals are met

The relationship between finance and other business functions

Venn diagram with intersecting circles representing marketing, operations, finance and HR, highlighting their interconnectedness. — **Financial decisions have an effect upon — and are affected by — other functional areas in a business**

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:
- Return on investment (ROI)
- Revenue, cost and profit objectives
- Cash flow objectives

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 following formula:

$ROI space equals space fraction numerator Profit space from space an space investment over denominator Capital space invested end fraction space cross times space 100$

Worked Example

NuVision manufactures fashion sunglasses. It recently invested £340,000 in a new lens finishing machine, which it expects to generate additional profits of £56,000 each year.

Calculate the annual return on investment (ROI) for the new lens finishing machine.

[2]

Answer:

Step 1: Divide expected annual profit by the cost of the investment

$equals space fraction numerator £ 56 comma 000 over denominator £ 340 comma 000 end fraction equals space 0.1647$ (1)

Step 2: Multiply the outcome by 100 and express as a percentage

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