Page 2: Establishing financial goals
Businesses need to have a clear direction to work towards, so that their employees know what they are seeking to achieve and what they need to do. The directors of a company (with the Finance Director or Chief Financial Officer playing a prominent role) establish financial goals which are used by investors, financial analysts and other external parties to monitor the performance of a company.
Because these financial goals can be set out in numbers, it is relatively easy to compare actual performance against the set targets. For example, by setting sales growth goals, it is possible to check progress in meeting sales targets.
Cadbury Schweppes has established three performance goal ranges for the period 2004-2007. These are:
- Net Sales Value (NSV) growth of between 3% and 5%. NSV growth refers to the growth in sales of the company - for example by selling more soft drinks, chocolate or chewing gum to supermarkets, which in turn sell to consumers.
- Operating margin growth of between 50 and 75 basis points per year. Operating margin growth refers to making more profit for each £1 of sales made - for example by buying ingredients and packaging materials as efficiently as possible.
- Free cash flow of £1.5 billion over the four-year period. Free cash flow reflects how much cash is generated within the business, for example by increasing profits. Free cash flow is important to enable the company to have the money available to meet its financial commitments.