Transcript Financial Strategies and accounts Understanding Financial

FINANCIAL STRATEGIES AND
ACCOUNTS
“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
UNDERSTANDING FINANCIAL
OBJECTIVES
UNDERSTANDING FINANCIAL OBJECTIVES
IN THIS TOPIC YOU WILL LEARN ABOUT:

Financial objectives
Assessing internal and
external influences of
financial objectives
BUSS3.2 Understanding Financial
Objectives
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FINANCIAL OBJECTIVES
Corporate Objectives
Financial Objectives
The monetary
targets a business
wants to achieve in a
given time period
BUSS3.2 Understanding Financial
Objectives
Functional Objectives
FINANCIAL OBJECTIVES
AN EXAMPLE : HEWLETT PACKARD

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: www.welcome.hp.com
BUSS3.2 Understanding Financial
Objectives
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.
FINANCIAL OBJECTIVES – CASH FLOW
TARGETS
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Required to meet the short term objective of survival
A healthy cash flow is necessary to meet day to day
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video clips
May be a specific cash flow target
To ensure all debts are received within 30 days
 To maintain a cash balance of £25,000
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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!
A cash flow target may be to keep a surplus in order to
take advantage of unforeseen opportunities
FINANCIAL OBJECTIVES – COST
MINIMISATION TARGETS
Actions can be taken to minimise fixed and / or
variable costs
 Can be achieved through tactical or strategic
changes
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Identify a cheaper source of raw materials
 Relocate production abroad
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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
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 %
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BUSS3.2 Understanding Financial
Objectives
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

Why is it
Dividends paid
important to look
after
 Dividends as a % of market value
shareholders?
 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.
BUSS3.2 Understanding Financial
Objectives
You will need access
to the internet to watch
these video clips
CAN YOU DEFINE EACH OF THESE KEY
TERMS?
Financial Objective
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Cost minimisation target

Return on capital employed

Cash flow target

Shareholder

Dividend
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Shareholders’ returns
BUSS3.2 Understanding Financial
Objectives
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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
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External
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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?
BUSS3.2 Understanding Financial
Objectives
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Factors from within
the business
Corporate and other
functional objectives
Characteristics of the
firm
Relationship between
owners and directors
Public or private
sector
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INTERNAL INFLUENCES

Financial objectives
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The characteristics of the firm
Capital vs Labour intensive
 Innovative
 Established
 Low cost or highly differentiated
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Relationship between owners and directors
Within a PLC these can be the same or different
 What is the power of individual shareholders?
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Public or private sector
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A key influence on the overall objective of a business
BUSS3.2 Understanding Financial
Objectives
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Will have to contribute towards achieving corporate
objectives
Will be influenced by other functional objectives
EXTERNAL INFLUENCES
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Competitors
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Consumers
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Degree of loyalty
Changing tastes
Economic conditions
Stable or unstable
 Economic growth or decline
 Optimistic or pessimistic
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External environment
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Political, social and technological change
BUSS3.2 Understanding Financial
Objectives
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Leader or follower
Degree and relative power of competition
Actions and reactions
ACTIVITY - FINANCIAL OBJECTIVES AND
OTHER FUNCTIONAL AREAS
Financial
Objectives
Cash flow
targets
Cost
Minimisation
ROCE targets
Shareholders’
returns
Marketing
Objectives
Operational
Objectives
Print this slide onto A4 and complete to explain the possible links
between each financial objective and other functional objectives.
BUSS3.2 Understanding Financial
Objectives
HR
Objectives