3.5.1 Setting financial objectives

Financial objectives: Return on investment

Companies (+ people) put capital at risk whenever take it out of back + invest it. Sometimes investment is a success eg Whitbread plc's purchase of Costa Coffee for £23m in 1995.

Sometimes unsuccessful - produces disappointing profits, or, like Morrisons' purchase of Kiddicare, significant losses.

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Financial objectives: Financial safety

Key to LT financial safety - keep debt levels under control. Should say no more than half firm's financing should come from debt. Financial analysts likely to check LT finances of business to see if LT bank loans more than half total sum invested in business in LT.

Good financial target to say 50% should be max allowable debt level for business - helps avoid business collapes eg RBS Bank 2009.

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Financial objectives: Capital structure objs

Need to think of right capital structure to max chance of LT financial safety. Should be based on assessment of level of operational risks they face.

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Financial objectives: Capital spending objs

For businesses in fiercely competitive tech markets, key to LT success to generate high enough profit margins to fun high levels investment spending on capital equipment + R&D.

Spending on cap equip enables quality + efficiency of production to rise (industrial robots), while spending on R&D -> product innovation. Microsoft vs Sony vs Nintendo (games consoles), Apple vs Samsung (phones).

To achieve LT market share desired by directors, generous objectives may be needed for capital spending + spending on R&D.

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Financial objectives: Cost minimisation

Business may concentrate on minimising costs. Lowering costs increases profitability. May be general overall aim, eg reducing fixed costs by 5%, may be more specific eg reducing wastage in factor + therefore reducing material costs by 4%.

Strategy may be necessary when times are hard.

Cutting fixed costs:
 - closing loss-making branches
 - moving head office to lower-cost location
 - remove layer of management to reduce staffing costs

Cutting variable costs:
 - renegotiate w/ existing suppliers to agree lower prices
 - look for new suppliers - low-cost country eg China
 - redesign goods, ake them simpler + therefore quicker + cheaper to produce.

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Internal influences on financial objectives

Ambitions of leader: Eg 2014, Dave Lewis, Tesco chief exec. Many left company before, Lewis could set agenda + choose own objectives. Chose to take time before deciding what targets should be.

Financial: Pursuit of higher profit might be constrained by lack of cash flow - especially when demand rising sharply.

Operational: Firm close to full capacity may find has fewer opps for improving profitability, unless has confidence + resources to increase capacity eg by moving to bigger premises.

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External influences on financial objectives

Competitive environment: Plans of almost every business can be affected by behaviour + reaction of competitors. A plan to increase profit margins by increasing prices may be wrecked if competitors react by reducing theirs.

Economic environment: State of economy vital part in ability of business to meet financial objs. Higher taxes may reduce customers' disposable income + spending - financial objs may not be met. Effect depends on business eg luxury goods suffer more than inferior.

Government: firm may have financial objs limited by regulatory/legislative activity. Consumer watchdogs eg Office of Fair Trading (OFT) have powers to fine business they believe aren't acting in best interests pf consumers. Legislation may be intro'd that increases business costs.

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Use of data for financial decisions

In NPD, can be argued pure judgement may be more successful than carefully researched 'facts'. Eg if look at Apple's accounts, legt in no doubt their finance director is serious-minded. Decisions in finance based on data.

Apple's capital structure will be decided on after careful analysis of company's accounts as well as rivals. Apple wants to stand out b/c of products, not b/c finances seem curious.

Every finance director has daily info available to show latest trends in profits, profitability, balance sheet health, cash flow etc. All financial decisions driven by data.

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Ethical + environmental influences

Rise of interest in environment meant costs increased, therefore profits reduced. However, many firms discovered can make huge savings by limiting waste.

Some firms (supermarket chains) accused of driving prices of suppliers to lowest poss level. Low supply costs increase profits. Businesses need to ensure balance b/ween keeping costs low + maintaining quality of supplies. May cause unacceptable welfare conditions for animals eg chickens - may backfire, affects reputation.

Taxation - large MNCs may deliberately reduce profits in 1 country to pay less tax, increases profit figures in another where profits taxed at lower level. Can do this by charging differential prices b/ween subsidies in diff countries. Legal, but not ethical.

Public image - may choose to spend money on charitable concerns - reduces profit, but will get return on investment by creating better brand image, good PR.

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Cash flow objectives

For established, large businesses, cash flow rarely important issue. Focus more on profits + profit margins.

Smaller firms, cash flow may be daily concern eg will have enough in bank to pay wage bill? Illustrates 1st cash flow target for small business - enough cash to meet all expected bills in coming moths, with a bit to spare.

Small girms growing, objectives more ambitious. Eg after opening successful tapas restaurant, brothers Eddie + Sam Hart 5 years to identify right premises for 2nd outlet. Barrafina (2) opened July 2014, Covent Garden - probably required close to £1 million investment. Targeting cash balance for investmetn would be part of reason took 5 years to complete plan.

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