F INANCIAL S TRATEGIES AND ACCOUNTS U NDERSTANDING F INANCIAL O BJECTIVES “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 BUSS3.2 Understanding Financial Objectives

U NDERSTANDING F INANCIAL OBJECTIVES I N THIS TOPIC YOU WILL LEARN ABOUT : Financial objectives Assessing internal and external influences of financial objectives BUSS3.2 Understanding Financial Objectives

F INANCIAL O BJECTIVES BUSS3.2 Understanding Financial Objectives Corporate Objectives Functional Objectives Financial Objectives The monetary targets a business wants to achieve in a given time period

F INANCIAL O BJECTIVES A N EXAMPLE : H EWLETT P ACKARD 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 objectives Source: BUSS3.2 Understanding Financial Objectives

F INANCIAL O BJECTIVES – C ASH F LOW 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 BUSS3.2 Understanding Financial Objectives Recap AS Cash 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

F INANCIAL O BJECTIVES – C OST M INIMISATION T ARGETS 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 BUSS3.2 Understanding Financial Objectives Remember the formula for profit TR – TC = Profit Therefore a firm that can minimise costs can increase profit margins

F INANCIAL O BJECTIVES – R ETURN ON C APITAL E MPLOYED 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 BUSS3.2 Understanding Financial Objectives

F INANCIAL O BJECTIVES – S HAREHOLDERS ’ 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) BUSS3.2 Understanding Financial Objectives 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?

C AN YOU DEFINE EACH OF THESE KEY TERMS ? Financial Objective Cost minimisation target Return on capital employed Cash flow target Shareholder Dividend Shareholders’ returns BUSS3.2 Understanding Financial Objectives At A2 remember it is still important to define key terms at the start of an examination answer.

I NTERNAL AND E XTERNAL I NFLUENCES BUSS3.2 Understanding Financial Objectives 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?

I NTERNAL I NFLUENCES 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 BUSS3.2 Understanding Financial Objectives

E XTERNAL I NFLUENCES 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 BUSS3.2 Understanding Financial Objectives

A CTIVITY - F INANCIAL O BJECTIVES AND OTHER F UNCTIONAL A REAS Financial Objectives Cash flow targets Cost Minimisation ROCE targetsShareholders’ returns HR Objectives Marketing Objectives Operational Objectives BUSS3.2 Understanding Financial Objectives Print this slide onto A4 and complete to explain the possible links between each financial objective and other functional objectives.