Any business needs to have a clear plan on how they are measuring and achieving success. Business objectives provide companies with specific actions to pursue and reach their company goals. One of the main types of business objectives is economic business objectives, as one of the main goals of a business is to make money.
The success of a business is often tied to money management. Financial planning helps businesses keep track of how much money is going in and going out. Which allows business owners to make informed economic decisions. Without economic business objectives, companies can run into problems quickly, affecting the overall performance of a company.
Let’s look at what economic objectives are and delve into the different types as well as some examples.
What are Economic Business Objectives?
Economic objectives, or financial objectives, are specific and measurable targets related to the financial health of the company. They ensure long-term economic stability and growth. These types of objectives help companies reach the overarching goal of profit maximization and sustainability.
A company’s economic objectives can be dependent on where they are on their business journey. A new start-up won’t have the same economic objectives as a large brand-name company that’s been in the business for 20 years. It can also be dependent on what the company wants to focus on at the moment as many objectives are specific to a financial area. Economic objectives help to focus a business’s efforts on improving a certain financial aspect.
It is often difficult, however, to meet economic objectives without also improving or focusing on other types of objectives. For example, let’s say one of your economic business objectives is to increase profit margins for your product-based business where you manufacture the product in-house. In order to increase profits, you may need to reduce the amount of waste materials created during the manufacturing process.
This means that if you set a few relevant operational objectives around reducing waste you may be able to save on manufacturing costs. This can directly or indirectly help you with your economic objective of increasing margins.
Types of Economic Business Objectives and Examples
Most businesses want to continue to bring in more money. Objectives around increasing revenue are one of the main types of economic objectives a business can set. Revenue is the amount of money a business brings in before expenses. More revenue means that businesses can reinvest in the company and continue to expand. Most companies increase revenue by focusing on increasing their marketing and sales efforts as well. They could also offer new products or look at increasing their market share.
Examples of objectives around increasing revenue include: increasing revenue by 10% over the next fiscal year; launching two new products by Q3; and booking 2x more sales meetings this quarter.
Increase Profit Margins
Profit margins are the price difference between the expense of producing and selling an item and how much an item sells for. It is the total profit of each sale. The larger the profit margin the more profitability a company has. Typically companies focus on increasing sales and at the same time decreasing expenses to increase their profit margins. This could look like streamlining processes to cut costs or raising the price of an item.
These objectives are often measured by percentages rather than a specific dollar amount. A company could, for example, set the objective to increase profit margins by 2% each quarter.
Decrease Overhead Costs
All businesses cost money to run. Overhead costs are any of the necessary business expenses to continue to operate. This can include the cost of materials, employee wages, utility bills, and rent. Decreasing operational costs overlaps with the objectives of increasing profit margins but is solely focused on reducing expenses.
This can look like building better relations with suppliers and renegotiating contracts. Another example would be to invest in energy-efficient strategies to lower utility charges. By using multiple strategies companies can have an objective to decrease overhead costs by a certain percentage by a specific time.
Improve Cash Flow
Cash flow is the amount of money that is coming in and out of a company. Typically companies have a goal of more cash coming in than money that is going out, this would be cash flow positive. There are three types of cash flow: operational cash flow, cash flow from investing, and cash flow from financing. Cash flow is important as it provides companies a cushion should they run into any issues such as low sale seasons, equipment breaking, or economic downturns.
Objectives that businesses can set to improve cash flow relate to reducing loans, credit sales, or costs, and increasing sales. This can look like recovering 75% of outstanding debts by the end of Q4 or selling 50% of surplus stock by Q1.
Return on Investment
There are two types of investments that businesses usually make. The first is investing in buildings, machinery, or other physical items related to increasing productivity. To justify the cost of purchasing these items, companies want to make sure the revenue generated from them is large enough. The second type of investments is stocks and bonds, that help companies increase their liquidity and cash flow. Similarly, businesses measure the capital gains and interest accrued by investments and want to ensure they make a profit from their investments.
Another important reason for setting objectives related to the Return on Investment (ROI), is that stakeholders will often use the Return on Invested Capital (ROIC) as a metric when looking at a business’s performance. If a company has a higher ROIC than competitors it could be easier for them to raise money.
Objectives set related to ROI are often longer-term, as it can take a while to see a return on investments.
This type of financial objective is usually only set when a company is in survival mode. This can come about during economic downturns and the overall goal is to keep the business running. A strategy called retrenching is often what businesses turn to in order to maintain profit levels and the brand.
Examples of objectives that businesses can set when trying to maintain financial stability involve reducing outgoing costs and keeping profits at a certain level. This can include paying off loans in full, collecting on outstanding debts from clients, and having consistent income levels. Ideally, these are short-term objectives businesses can set until they can pivot back to focusing on increasing their profits and revenue.
As you can see from this article, there are many economic objectives a business can set. Deciding which objectives to focus on will be determined by the overall goals a business currently has. Setting economic objectives, as well as other types of business objectives, will provide a more structured and actionable plan for businesses to set themselves up for long-term success.