3.5.1 - Financial objectives, cash flow and profit

Financial objectives and priorities

Financial objectives specify the financial results a business intends to achieve over a stated period.

An objective such as “increase annual operating profit by 8%” gives managers a measure and deadline against which to compare decisions. A revenue objective concerns sales value; a cost objective concerns expenditure or cost per unit; a profit objective concerns the difference between revenue and the relevant costs. They are connected, but achieving one does not guarantee the others. A retailer can raise revenue by selling more at a discount while its profit falls because the extra sales contribute too little towards costs.

Comparing returns with funds invested

A workshop invests £50,000 and expects additional annual profit of £8,000.

1. Divide the stated annual return by the investment:

1. Convert the proportion to a percentage:

1. State the meaning: expected additional annual profit is 16% of the initial sum invested. This simple comparison does not account for cash timing.

A repair centre invests £75,000 and expects additional annual profit of £9,000.

1. Use the same annual basis:

1. Express the annual return as a percentage:

1. The second project has a higher profit amount but a lower proportional return. Reliability, life, cash timing and purpose still matter; this concept does not replace the later appraisal methods.

Cash-flow objectives concern the timing and balance of cash received and paid. Illustrative case: a seasonal business sets a minimum cash-balance target of £15,000 before its quiet winter months, alongside its objective of higher annual profit. That reserve allows it to pay staff and suppliers when sales receipts are low. A young business often prioritises survival and liquidity; an established business may be able to accept a temporary fall in profit to develop a new product.

Financial objectives connect functions. A marketing campaign needs a budget, an operations investment changes costs and human resources must recruit within financial constraints. Overly narrow cost targets may encourage cheaper materials or reduced training, damaging quality and future demand. An ethical or environmental commitment may justify a more expensive supplier if it protects workers, reliability or the business's mission. The value of an objective therefore depends on its feasibility, consistency with other objectives and the behaviour it encourages.

Monzo reported its first full year of profitability in FY2024, with £15.4 million profit before tax and £880.0 million revenue. A growing customer business still needs costs and returns assessed separately from revenue. The explicit profit measure and year make the milestone meaningful, while the company's banking model needs different comparisons from a manufacturer. Monzo's FY2024 report.

Why profit and cash flow differ

Profit measures income earned less the relevant costs for a period, while cash flow records money actually entering and leaving the business.

Revenue earned before cash arrives

A designer completes a £6,000 order in June and receives payment in July. All £4,000 costs are incurred and paid in June.

1. Match the sale with its costs to calculate June profit:

1. Include only June receipts and payments for June cash flow:

1. The £6,000 receivable supports recorded revenue, but it cannot pay June bills before collection.

A receipt before revenue is earned

A furniture installer receives a £3,500 customer deposit in September for work completed in October. No work or related expenditure occurs in September.