Financial objectives

Financial objectives

• 1.
  Financial Objectives
• 2.
  Recap • What isa corporate objective? • What are business functions? • Can you give and example of a functional objective? • How are functional objectives and corporate objectives related? • What is the relationship between functional objectives and the functional strategies?
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  Financial objectives andaccounts What we will examine; • The types of financial objectives businesses pursue • The external and internal influences on financial objectives
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  Key terms Profit- thesurplus of revenues over total costs at the end of a trading period Cash flow- the movement of money in and out of a business over a period of time Return on Capital Employed- the net profits of a business expresses as a percentage of the value of capital employed
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  Financial objectives • Agoal or target pursued by the finance department within an organisation • Likely that it will contain a specific numerical element and also a timescale within which it is to be achieved • It will be set by the managers responsible for the finance of the business
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  Thought shower activity Financial objectives
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  Financial objectives • Return on capital employed (ROCE) targets • Shareholders’ returns • Cost minimisation • Cash flow targets
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  Cash-flow targets Cash-flow is the money Examples; coming in (inflows) and out • Maintaining a minimum closing (outflows) of a business monthly cash balance • Reducing the bank overdraft by a certain sum by the end of the year • Creating a more even spread of sales revenue • Spreading its costs more evenly • Achieving a certain level of liquid, Many businesses get into non-cash items. difficulty due to a lack of cash • Raising certain levels of cash at a flow rather than lack of particular point in time profitability. • Setting contingency fund levels
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  Cost minimisation This typeof target benefits a business Examples: in two ways: • Achieving a certain cost • It can keep its price the same and reduction in the purchase benefit from a higher profit of raw materials margin • Reducing wage cost per • It can use its cost reduction to unit reduce selling price of its finished • Lowering levels of wastage product and t as a result attract • Relocating the business to more customers the ‘least-cost’ site • Reducing the cost per thousand customers (CPT) of the business’s promotion These types of targets should be made and advertising with caution as cheaper raw materials • Improving the efficiency of may lead to inferior quality production by reducing variable costs per unit
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  ROCE targets Capital employedis a measure of the value Examples; of the resources used by a business and is • To achieve a ROCE that an excellent guide to its size. exceeds the level recorded in Profit targets are often expressed as a the previous year by a return on capital employed. certain percentage. • To achieve a ROCE that compares favourably to the average ROCE achieved in the UK • To achieve a ROCE that exceeds the level of a particular competitor or group of competitors
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  Shareholders’ returns Examples; A business must satisfy the needs of its • A high dividend per share owners. Many shareholders assess a • A high dividend yield business in terms of dividends they receive. • Increasing the share price However they may have other objectives • High earnings per share that need to be considered (non-financial)
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  Reasons for settingfinancial objectives • Act as a focus for decision making and effort • Provide a yardstick against which success or failure can be measured • Improves coordination • Improves efficiency • Allows shareholders to assess whether the business is going to provide a worthwhile investment • Enables outside organisations (suppliers and customers), to confirm the financial viability of a business
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  Internal influences onFO • Corporate objectives • Nature of the product that is sold • Objectives of the senior managers • Finance • Human resources • Operational factors • Resources available
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  External influences onFO • PESTLE analysis • Actions of other businesses • Market factors • Suppliers
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  Case Study AQA A22nd edition Business Studies textbook Page 17, Case Study 1 ‘Halfords heads east’ Case study Questions ONLY! (1&2)