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Objectives of Company | Formal and Operational

Objectives of Company

The purpose of this article is to clear a distinction between two different types of objectives of companies, on the one hand, the formal objectives (or performance targets) and other tangible goals.

Objectives of Company (Formal)

Often also called success targets, because these are aimed at the immediate success of the company’s activities. In addition, formal objectives are overriding objectives in which all business activities are oriented. The basic principle of all formal objectives is always the economic principle, ie the maximization of profits.

Classical formal goals are profit, productivity, profitability.

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Productivity:

Productivity describes the quantitative relationship between output and input of production factors. Input is the power input, that is, in the lower example, the wood which the carpenter consumes to produce tables. The output is the result of the performance, that is, the tables that the joiner produces from the input (the wood).

Formula:

Productivity = Output / Input

Example: A carpenter makes 500 tables and needs 2500kg of wood.

Productivity = 500/2500 = 0.2

Next year, he produces 550 tables of 2500kg wood.

Productivity = 550/2500 = 0.22

With a productivity of, for example, 2.5, you can not make any useable statements, because you have to look closely at the industry, the product, the company and the time unit. For example, you can use productivity to investigate whether the wood is used more effectively for table production than in the time period before.

With the help of partial productivities one tries to increase the meaningfulness of the characteristic numbers.

The following sub-productivities are often found:

Labor productivity: For example, a worker can install 40 windshields in cars in 8 hours.

Work productivity: 40/8 = 5 -> An employee can install 5 windshields in an hour.

Area productivity = Turnover / m² -> Used particularly frequently in retail food retailing

Economics:

Profitability describes the relationship between yield and the use of production costs. Here, too, the industry, the respective company and a defined period of time must always be consulted in order to gain meaningful insights.

Formula:

Profitability = Earnings / Expenses

Example:

A merchant buys computers for 25,000 $ and sells them for 25,000 $.

Profitability: 25,000 / 25,000 = 1 -> Profitability or loss is not achieved with a profitability of 1.

Then the merchant increases the prices for the PC’s and sells it for 30,000 $.

Profitability: 30,000 $ / 25,000 $ = 1,2

In this way, he can generate an income of $ 1.2 with an expense of Dollar.

Profitability:

One of the most important formal objectives is profitability, which is the ratio between success and capital.

Formula:

Profitability = profit / capital

Further profitability is:

Total capital profitability = profit + borrowed capital / total capital (i.e equity capital and debt capital) * 100

Equity ratio = profit / equity * 100

-> above all the return on equity depends strongly on the capital structure in the company, because if the company has little equity, the return on equity can be very high, despite low profits.

Turnover Profitability = Profit / Turnover * 100

-> With the profitability you can calculate how much of the sales actually remain.

Objectives of company (Operational)

Objectives are aimed at the formal objectives and relate to concrete actions in the various functions of the company, which contribute to the management of the company. Overall, the number of key figures is less linked to the figures, since potential objectives such as working conditions can not be expressed in key figures.

Objectives can be divided as follows:

Performance targets:

Are targets that relate to the market, products, services, etc., which are decisive for the area of production and sales.

Financial objectives:

For the finance department, it is important to ensure the ability to pay and make capital available for investment. The liquidity, for example, serves as an indicator for achieving the objective of a company’s solvency.

Management and organizational objectives:

Employee-related goals, too, concern the management of the workforce and personnel management. The company’s key objectives include, for example, a fair remuneration of the employees or the improvement of the training opportunities of the employees.

Social and environmental objectives:

Or societal goals, are designed to help companies as part of society to help solve societal problems. Aspects such as environmental protection could be part of a company’s objective. Another objective of enterprises could be the employment of handicapped people, for example. 

Objectives influence the company’s activities and, in particular, the management of the company to a very high degree, because the setting of different goals also leads to different entrepreneurial developments.

About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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