FINANCIAL STRATEGIES AND ACCOUNTS

UNDERSTANDING FINANCIAL OBJECTIVES

“Business is all about putting out money today to get a whole lot back later.”

Warren Buffet

“Only a fool holds out for top dollar”

J.P. Kennedy

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UNDERSTANDING FINANCIAL OBJECTIVESIN THIS TOPIC YOU WILL LEARN ABOUT:

Financial objectives

Assessing internal and external influences of financial objectives

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FINANCIAL OBJECTIVES

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Corporate Objectives

Functional Objectives

Financial Objectives

The monetary targets a business wants to achieve in

a given time period

FINANCIAL OBJECTIVES AN EXAMPLE : HEWLETT PACKARD To achieve sufficient profit to finance our

company growth, create value for our shareholders and provide the resources we need to achieve our other corporate objectives.

Underlying beliefs supporting this objective: Profit is the responsibility of all Balance of long-term and short-term objectives is key

to profitability Profit allows us to reinvest in new and emerging

business opportunities Profit is highly correlated to generating cash, which

brings more flexibility to the business at a lower cost Profit enables the achievement of our corporate

objectivesSource: www.welcome.hp.com

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FINANCIAL OBJECTIVES – CASH FLOW TARGETS

Required to meet the short term objective of survival A healthy cash flow is necessary to meet day to day

expenses May be a specific cash flow target

To ensure all debts are received within 30 days To maintain a cash balance of £25,000

A cash flow target may be to keep a surplus in order to take advantage of unforeseen opportunities

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Recap ASCash flow is the movement of money into and out of a business. If the net effect is negative then a

business may face cash flow (liquidity) problems.

Lisa has cash flow problems!

You will need access to the internet to watch this video clips

FINANCIAL OBJECTIVES – COST MINIMISATION TARGETS

Actions can be taken to minimise fixed and / or variable costs

Can be achieved through tactical or strategic changes Identify a cheaper source of raw materials Relocate production abroad

Will only be effective if sales revenue and company reputation are not diminished

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Remember the formula for profitTR – TC = Profit

Therefore a firm that can minimise costs can increase profit margins

FINANCIAL OBJECTIVES – RETURN ON CAPITAL EMPLOYED TARGETS

Return = how much money is the business getting back

Capital Employed = how much money is being used within the business

ROCE = a measure of a firm’s profitability and performance

How effectively is it using the money tied up in the business to generate profit

ROCE targets will be set as a % Benchmark to industry standard Internal benchmarking External factors e.g. Interest rate

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FINANCIAL OBJECTIVES – SHAREHOLDERS’ RETURNS

Remember at A2 you are now looking at PLCs and therefore shareholders are a key consideration in the setting of objectives

A target to maximise shareholders’ returns may conflict with the objectives of other stakeholders

Measuring shareholders’ return Dividends paid Dividends as a % of market value Market value of share (poss. in relation to original

purchase price)

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Different shareholders will have different objectives, some will be willing to sacrifice short term gains for longer terms benefits.

These potential conflicts can be troublesome for directors.

You will need access to the internet to watch these video clips

Why is it important to look

after shareholders?

CAN YOU DEFINE EACH OF THESE KEY TERMS?

Financial Objective

Cost minimisation target

Return on capital employed

Cash flow target

Shareholder

Dividend

Shareholders’ returns

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At A2 remember it is still important to

define key terms at the start of an

examination answer.

INTERNAL AND EXTERNAL INFLUENCES

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Internal Factors from within

the business Corporate and other

functional objectives Characteristics of

the firm Relationship

between owners and directors

Public or private sector

External Factors from outside

the business Competitors Consumers Economic conditions External

environment

You will need access to the internet to watch this video clip

What are the key internal and

external factors causing Wal-Mart not to meet its

financial objectives?

INTERNAL INFLUENCES

Financial objectives Will have to contribute towards achieving corporate

objectives Will be influenced by other functional objectives

The characteristics of the firm Capital vs Labour intensive Innovative Established Low cost or highly differentiated

Relationship between owners and directors Within a PLC these can be the same or different What is the power of individual shareholders?

Public or private sector A key influence on the overall objective of a business

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EXTERNAL INFLUENCES

Competitors Leader or follower Degree and relative power of competition Actions and reactions

Consumers Degree of loyalty Changing tastes

Economic conditions Stable or unstable Economic growth or decline Optimistic or pessimistic

External environment Political, social and technological change

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ACTIVITY - FINANCIAL OBJECTIVES AND OTHER FUNCTIONAL AREAS

Financial Objectives

Cash flow targets

Cost Minimisation

ROCE targets Shareholders’ returns

HR Objectives

Marketing Objectives

Operational Objectives

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Print this slide onto A4 and complete to explain the possible links between each financial objective and other functional

objectives.