3.2 understanding financial objectives

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3.2 understanding financial objectives

  1. 1. A2 Unit 3:A2 Unit 3: Strategies for successStrategies for success 3.2 Understanding3.2 Understanding financial objectivesfinancial objectives
  2. 2. What are financial objectives?What are financial objectives? An objective of a business is an outcome which allows a business to achieve its aims Objectives should be SMART: •Specific •Measurable •Agreed •Realistic •Time specific Financial objectives are the goals or targets a business sets itself for its financial performance
  3. 3. Typical financial objectives Cash flow targets Cash flow targets Cost minimisation Cost minimisation Return on capital employed Return on capital employedShareholders’ returns Shareholders’ returns
  4. 4. Cash flow targetsCash flow targets Without cash a business is likely to face failure • it needs to pay its bills • it may need cash at particular times of the trading year – for example for investment / capital expenditure Cash flow targets ensure that a business has enough cash when it is needed See this example
  5. 5. Cost minimisationCost minimisation Reducing costs is a way of raising profits There are, obviously, lots of ways of reducing costs: • reducing waste by recycling • reducing staff levels by automation • adopting lean production methods • closing down unprofitable activities • finding cheaper suppliers • reorganisation • outsourcing
  6. 6. Investigation task: 1. Find out how British Airways plans to reduce its costs by £450 million 2.Why has it set itself this objective? 3.Are there any disadvantages of the objective?
  7. 7. Return on capital employedReturn on capital employed ROCE is the amount of profit a business generates in relation to the amount of money invested in the business ROCE is of particular interest to the owners of the business • they have probably invested the most money! Objectives might be • to increase ROCE over time • to match or exceed the ROCE of other businesses in the same industry
  8. 8. Task: Complete the ROCE task about ITtop.com
  9. 9. Shareholders’ returnsShareholders’ returns Financial objectives are often influenced by shareholders’ interests Shareholders might be interested in • dividend per share - the amount of profit paid to shareholders per share • dividend yield - dividend paid can be misleading – it must be related to the price of the share = (dividend per share / share price) x
  10. 10. Shareholders’ returnsShareholders’ returns Financial objectives are often influenced by shareholders’ interests Dividend per share: amount of profit paid to shareholders per share Dividend per share: amount of profit paid to shareholders per share Dividend yield: (dividend per share / share price) x 100 Dividend yield: (dividend per share / share price) x 100 Total shareholder return (TSR): combines dividend paid and share price increase Total shareholder return (TSR): combines dividend paid and share price increase
  11. 11. Investigation task: 1.Find out BT’s TSR over the last five years 2.To what extent has BT delivered a satisfactory return to its shareholders?
  12. 12. Influences on financialInfluences on financial objectivesobjectives The financial objectives set by a business are affected by • internal factors • external factors These factors may pull the business in different directions • which factor (s) exerts the strongest influence will vary over time • external factors can be particularly significant as they are outside the control of the business
  13. 13. Internal influences StakeholdersStakeholders CapacityCapacity Departmental influence Departmental influence Corporate strategy Corporate strategy Ethical stance Ethical stance
  14. 14. External influences Economic climate Economic climate CompetitionCompetition Political factors Political factors Consumer tastes Consumer tastes LegislationLegislation World events World events Pressure groups Pressure groups Population trends Population trends
  15. 15. Use the BBC Business website to identify a range of factors which might influence airlines’ financial objectives Start with this article Airlines seek safe berth in storm Investigation task 1Investigation task 1
  16. 16. Read the Business Cafe article (‘Can Sony’s New Strategy Deliver the Goods?’) and answer the questions on the worksheet Investigation task 2Investigation task 2
  17. 17. HomeworkHomework 1. Complete the task on Cygnus Business Media and hand in for assessment next lesson. 2. Read the Case Study on ‘Case Alarm Systems’ and answer questions (a), (b), (c) and (d)

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