Financial objectives


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Financial objectives

  1. 1. Financial Objectives
  2. 2. Recap• What is a 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?
  3. 3. Financial objectives and accountsWhat we will examine;• The types of financial objectives businesses pursue• The external and internal influences on financial objectives
  4. 4. Key termsProfit- the surplus of revenues over total costsat the end of a trading periodCash flow- the movement of money in and outof a business over a period of timeReturn on Capital Employed- the net profits of abusiness expresses as a percentage of the valueof capital employed
  5. 5. Financial objectives• A goal 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
  6. 6. Thought shower activity Financial objectives
  7. 7. Financial objectives• Return on capital employed (ROCE) targets• Shareholders’ returns• Cost minimisation• Cash flow targets
  8. 8. 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
  9. 9. Cost minimisationThis type of 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 promotionThese types of targets should be made and advertisingwith caution as cheaper raw materials • Improving the efficiency of may lead to inferior quality production by reducing variable costs per unit
  10. 10. ROCE targetsCapital employed is 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
  11. 11. Shareholders’ returns Examples; A business must satisfy the needs of its • A high dividend per share owners. Many shareholders assess a • A high dividend yieldbusiness 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)
  12. 12. Reasons for setting financial 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
  13. 13. Internal influences on FO• Corporate objectives• Nature of the product that is sold• Objectives of the senior managers• Finance• Human resources• Operational factors• Resources available
  14. 14. External influences on FO• PESTLE analysis• Actions of other businesses• Market factors• Suppliers
  15. 15. Case StudyAQA A2 2nd edition Business Studies textbookPage 17, Case Study 1 ‘Halfords heads east’Case study Questions ONLY! (1&2)