• Created by: rebecca
  • Created on: 17-05-15 11:01

Financial objectives

Goals that must be met by the finance department in order to meet overall corporate objectives.


  • cash flow and liquidity
  • cost minimisation
  • ROCE
  • shareholders' return
1 of 57

Internal influences on financial objectives

Factors stemming from inside the business:

  • corporate objectives
  • age
  • size
  • legal structure
  • size & strength of worker representation
2 of 57

External influences on financial objectives

Factors stemming from outside of the business.

  • availability of finance
  • state of the economy
  • legislation
  • competition
  • state of the market
3 of 57


The extent to which a person/business has cash to meet short term debts, including how quickly assets can be turned into cash

Impacts of poor liquidity:

  • delaying payments to suppliers
  • loss in purchasing economies of scale
  • loss of potential business
  • increased borrowing
  • inability to grow / expand

How to secure liquidity:

  • monitor and contol cash
  • get product to market quickly
  • cut costs
  • reduce inventory levels
4 of 57


Value lost over time

Why do assets depreciate?

  • wear and tear
  • lack of maintenance / servicing
  • technological advances
  • product obselence

Impacts of depreciation:

  • effect on asset value - decreases
  • effect on profit - reduces
  • effect on cash
5 of 57

Profit utilisation

Refers to how much profit is being used, e.g. in dividends or retained profit.

Factors that determine profit utilisation:

  • competition - hard to justify lower dividends if competitors are offering similar dividends
  • rate of inflation - if its high, investors require an increase in dividends each year
  • state of the market - if its saturated, growth is harder so share price is limited
6 of 57

Financial data in judging performance


  • balance sheets - assess net worth of a business, level of gearing, level of liquidity, level and nature of fixed assets
  • income statements - assess growth in turnover, growth in profit


  • out of date
  • missing information - non financial objectives e.g. USP
  • inflation
  • window dressing
7 of 57

Liquidity Ratios

1) Current Ratio:

  • includes stock
  • shows if there is enough cash to pay debts
  • if too high, it highlights there is too much stock
  • 1.6:1

2) Acid Test:

  • stock is left out as its the least liquid (hard to turn into cash quickly)
  • show if there is enough cash to settle debts
  • 1:1
8 of 57

Profitability Ratios

1) ROCE:

(return on capital employed)

  • relates profit to the size of the business
  • shows profit made on capital invested
  • ideal is 20-30%
9 of 57

Efficiency Ratios

1) Asset Turnover:

  • measurement of how many £ worth of sales a business generates from assets employed
  • higher times = better performance

2) Inventory Turnover:

  • reducing the avr. level of inventory held without losing sales can increase inventory turnover
  • increasing the rate of sales without raising levels of stock

3) Payables' (creditors) days:

  • number of days it takes a business to pay any money owed to suppliers (creditors)
  • should be higher than the receivable days

4) Receivables' (debtors) days:

  • number of days it takes debtors to pay money owed to the business

5) Gearing Ratio:

  • measures the extent a business is dependent on borrowed funds
10 of 57

Shareholder Ratio

1) Dividends per share:

  • shows the amount of money sharholders receive per share
  • higher = better
  • high result can be obtained by: greater profits, giving more profits out as dividends, buying back shares

2) Dividend yield:

  • shows rate of return a shareholder gets by comparing the market value with dividends received
  • higher = better
11 of 57

Value and limitations of ratios


  • show effieciency of management
  • show financial stability
  • how well owners / shareholders are doing
  • compare performance over time

Limitations: dont show changes in...

  • inflation
  • accounting methods
  • business's activities
  • differences in product mix & end of financial year
  • window dressing
  • outdated information
12 of 57

Profit Centres

A unit within the business that generates both revenue and incurs costss and has its own income statement.

  • enables individual financial performance to be monitored
  • generates team spirit amongst smaller units rather than the business as a whole
  • shows how individual parts of the business are performing in terms of profit
  • helps to ensure appropriate decisions are made that make effective use of resources to maximise potential


  • can improve motivation and decision making
  • shows where profit is made


  • time consuming to set up
  • may persue own objectives over the objective of the whole firm
13 of 57

Full Costing

Where all the indirect costs incured by a businessare totalled and divided then allocated to different cost centres


  • simple to use
  • inexpensive


  • innacurate
14 of 57

Absorption Costing

Where each overhead is absorbed separately by the profit centre.


  • fair
  • more accurate


  • more expensive to carry out
  • not all costs can be divided equally
15 of 57

Marginal / Contributing Costing

Where direct costs are allocated to the profit centres; indirect costs are only included when preparing whole firms profit / loss.


  • simple to understand


  • misleading
  • if for setting prices, need to be careful with fixed costs
16 of 57

Cost Minimisation

Involves identifying all costs in producing the product and where they can be reduced without affecting quality.


  • material costs - cheaper suppliers, buying in bulk
  • wages and salaries - cutting staff hours, reduce overtime
  • advertising / promotion - look around for best rates
  • energy / bills - LED light bulbs
17 of 57

Investment Appraisal

Considers the benefitrs of an investment decision in relation to the costs e.g. increased revenue.

1) Payback - amount of time it takes for an investment to recover or payback initial costs of investments

2) Average rate of return - measures the net return each year generated from the investment as a percentage of the intial capital cost of the investment

3) Net Present Value - calculates and then totals the present values of all expected future cash flows of an investment and subtracts these from the original investment

18 of 57


amount still needed

              -------------------------------------    X 12

next years net cash flow


  • measures time to recoup costs
  • quick and simple
  • most common method of appraisal
  • ignores profit and any returns after payment
19 of 57

Average rate of return analysis

annual net return OR average profit

                        -------------------------------------------------------------             X 100

initial capital outlay OR assests initial costs

1) add all net cash flow together

2) take away any initial investment from this

3) divide this from total number of years (average profit)

4) average profit divided by initial investment X100


  • focuses on time not profit
  • consideres whole life of the project
  • ignores timing of return
20 of 57

Net present value analysis

q(1+r) ^n

q = the amount invested

r = the rate of interest (as a decimal)

n = number of years the capital in invested


  • takes into account 'time value' of money
  • this makes allowance for risk and opportunity
  • calculation based on discounted
  • takes into account profits and timing of flows
  • if NPV is positive, its accepted; if negative, its rejected
21 of 57

Influences on investment appraisal

Quantitative influences = factors that can be easily measured

e.g. the size, weight, amount, payback, average rate of return, net present value

Qualitative influences = factors that cannot be easily measured

e.g. thoughts, feelings, corporate image, corporate objectives

22 of 57

Marketing Objectives

Common examples...

  • product / brand awareness
  • customer base / sales
  • customer quality
  • market position
  • market share
23 of 57

Internal influences on marketing objectives

  • corporate objectives
  • amount of finance avaliable
  • size and quality of HR
  • operational issues e.g. production capacity and methods
24 of 57

External influences on marketing objectives

  • political and legal factors
  • economic factors
  • social, ethical and market factors
  • technological change
  • competitor activities
  • cost of materials, quality and reliability of suppliers
25 of 57

Market Analysis

The process that attempts to identify and measure market characteristics through a range of market research techniques to aid decision making and planning.

It may try to identify...

  • size of market
  • market trends
  • market growth
  • potential profitability
  • level of competition
26 of 57

Market analysis continued...

Reasons for market analysis:

  • identify whats happening now - is the market increasing/decreasing? who are the customers?
  • identify what may happen in the future - help forecast sales level
  • establish why something is happening - e.g. drop in sales
  • create new strategies

Value of market analysis:

  • because of rapid change in the market
  • increased competition
  • more demanding customers
27 of 57

Extrapolation & Moving Averages

Extrapolation = the use of past data to establish trends which are projected forward into the future

Moving averages = a collection of averages calculated for a group of data shown over a certain number to equal time periods


  • emplify what is currently happening
  • make predictions about sales to allows businesses to plan


  • moving averages dont explain why it is happening
  • extrapolation predictions are based on assumption that history will repeat (i.e. doesn't take into consideration interest rates, new competitors, external factors etc)
28 of 57


The relationship between 2 variables.


  • there are many factors that can affect a particular variable

e.g. fall in interest

       fall in taxation rates

       closure of a major competitor

29 of 57

Test Marketing (+/-)

Involves the launch of a product on a limited scale in a representative part of the market to assess consumer reaction and forecast future sales.


  • can be effectivive when determining whether a new product is likely to acheive the desired results
  • save costs in the long run by improving the product first if needed


  • may not reflect the whole market
  • more of a generalisation
30 of 57


Can be defined as "the aquisition, processing, storage and dissemination of vocal, pictiorial, textual and numerical info by a combination of computing and telecommunication.


IT can be used in market analysis...

1) data collection

2) data analysis

3) data presentation

31 of 57

Use of IT in analysing markets

1) Data collection:

  • first stage of market analysis
  • increased effieciency
  • e.g. sending & receiving info by text, email etc, can be done at great speed within and between countries

2) Data analysis:

  • can be carried out more quickly and cost effective
  • i.e using spreadsheets and database software
  • spreadsheets enable calculations to be made out of the figures quickly/easily
  • databases file information

3) Data presentation:

  • spreadsheets (e.g. excel) can produce graphs, charts etc.
32 of 57

Potential difficulties with analysing marketing da

Limitations of marketing data through secondary sources:

  • may be cheap but not up to date
  • may not represent what is currently happening in the market
  • not specific to the business

Difficulties securing the resources required:

  • obtaining primary data can be time consuming and costly
  • primary sources may require skilled personnel to undertake the research
  • lack of finance
33 of 57

Cost Leadership

Involves producing at the lowest cost to offer a low cost product, e.g. outsourcing, economies of scale, technology, relocating.


  • price advantage over rivals
  • greater profitability


  • customers may perceive the product to have a lower quality
34 of 57


Making the product different to the competitors

i.e. to increase profits by charging higher

      to increase market share by offering a better product but same price


  • charge higher for a profit
  • increase sales
  • increase market share
  • more loyal customers


  • expensive 
  • hard to accomodate for customers' different needs
35 of 57


A strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future growth.


1) Market Penetration

2)Market Development

3) Product Development

4) Diversification

36 of 57

Market Penetration - ANSOFF

  • selling more of the same product to the same market 
  • least risky
  • only possible when the market is growing or the business has a competitive advantage to gain market share

It can be achieved by...

1) increasing the frequency / quantity purchased by customers

2) attracting competitors customers

37 of 57

Market Development - ANSOFF

  • involves increasing sales of present products in new markets
  • requires more market research

It can be achieved by...

1) targeting new geographical markets (nationally / internationally)

2) targeting new ages, social / economic groups

38 of 57

Product Development - ANSOFF

  • selling new products to present markets

It could involve...

- changing the materials, ingredients, colour etc

- adding a new feature

- having a new size 

- improve performance of the product

39 of 57

Diversification - ANSOFF

  • selling new products to new markets

Two types of diversification:

1) RELATED - diversifying into areas which have a current link to the business

2) UNRELATED - where a business enters a different industry

40 of 57

International markets (+/-)

Benefits of entering international markets:

  • growth and profit increases
  • survivcal from recession
  • survival from saturated markets
  • spreading of risk
  • economies of scale
  • increased competitiveness
  • enhanced image

Costs of entering international markets:

  • lack of knowledge and experience
  • social, cultural and language differences
  • political differences
  • leagal differences
  • economic factors (i.e. exchange rates)
  • lack of customer awareness
  • additional / increased costs
41 of 57

Ways to reduce the risk of entering international

  • in depth research and analysis
  • detailed business plan
  • keeping investment in fixed assets to a minimal
  • appoint personnel in overseas market
  • training 
  • insurance
42 of 57

Marketing Plans

A report outlining a firms marketing objectives, strategies and tactics e.g. budgets, timings, forecast results.

Should take into account...

  • corporate objectives
  • internal capabilities
  • external opportunities and threats
43 of 57

Influences and issues on marketing plans

Internal influences:

  • marketing and decisions over business objectives
  • finance available
  • HR issues - skills and availability of workforce
  • Opts issues - capabilities of existing plant and equipment

External influences:

  • customer needs and wants
  • competitors actions, strengths and weaknesses
  • economy
  • legislation

Issues implementing marketing plans

  • need for in depth research and analysis: COSTLY
  • lack of research for internal / external factors
  • changes in the business environment
  • fail to communicate with other functional areas
44 of 57

Influences and issues on marketing plans

Internal influences:

  • marketing and decisions over business objectives
  • finance available
  • HR issues - skills and availability of workforce
  • Opts issues - capabilities of existing plant and equipment

External influences:

  • customer needs and wants
  • competitors actions, strengths and weaknesses
  • economy
  • legislation

Issues implementing marketing plans

  • need for in depth research and analysis: COSTLY
  • lack of research for internal / external factors
  • changes in the business environment
  • fail to communicate with other functional areas
45 of 57

Operational Objectives

Targets relating to operational objectives: 

  • increase customer satisfaction levels
  • reducing customer complaints
  • reducing number of rejects
  • improve reliability of product
  • minimise costs
46 of 57

Influences on operational objectives

Internal influences:

  • nature of product
  • corporate objectives
  • finance available
  • produtive workforce

External influences

  • customer needs
  • market and demand
  • competitors
  • economy changes
  • political and legal reasons 
  • cost of materials
47 of 57

Economies of scale

Factors that lead to a reduction in unit costs as a business increases its output / size and scale of operations e.g. buying in bulk 

Internal economies of scale:

  • purchasing - in bulk
  • technical - new modern machines / technology
  • finance - have larger assets to offer
  • risk bearing - spread the risk

Internal diseconomies of scale:

  • technical - if the machine breaks the production stops
  • communication - more levels so slower decision making
48 of 57

Capital intensive strategies

Uses capital more than labour

e.g. flow production and mass production


  • quicker
  • more reliable
  • shorter production times
  • minimise costs from poor quality


  • set up costs i.e. machinery, maintenance, depreciation
  • redundancies
  • training for machinery
  • disrupt operation during set up
49 of 57

Labour intensive strategies

Uses labour more than capital

e.g. job production and batch production


  • no upfront capital outlay
  • social benefits
  • greater flexibility 


  • more complex to manage
  • external factor (i.e. illness, moving house)
  • have to invest in motivation, retainment etc
50 of 57


Successful implementation of a new idea; creative and inventive


  • improve quality and value of product
  • extend the life of a product 
  • extend product portfolio
  • replace declining products
  • create a new market / enter a new market
  • respond to competitors


  • cost of R&D and implementation
  • risk of failure
  • impact on workforce 
  • risk of competitors copying 
51 of 57


Quantitative influences:

  • availability and cost of land / premises
  • availability of funds / grants
  • availability of labour
  • access and proximity to materials / suppliers / technology / customers
  • infrastructure
  • location of competitors
  • state of local economy

Qualitative influences:

  • image
  • tradition
  • labour relations
  • owners preference
  • quality of life
52 of 57

Multi-site (+/-)

The occupation of a business of more than one physical location (i.e. factories in a variety of locations)


  • permit specialisation
  • spread risk 
  • enable growth
  • improve customer service
  • lower costs
  • minimise disruption of existing operation


  • harder to manage
  • potential loss in economies of scale
53 of 57

Reasons for and against international locations


  • sell to foreign markets
  • lower costs


  • barriers to trade
  • currency fluctuations
  • transport costs
  • utility costs
  • legal differences
  • political stability
  • differences in taxes
  • cultural / language barriers
54 of 57

Lean Production

Minimising the use of resources and reduce waste.


  • minimising costs
  • maximising quality
55 of 57

Critical Path Analysis

Allows a business to estimate the shortest possible time in which a project can be completed.


  • estimating and minimising completion time
  • planning and organising projects
  • prioritising resources
  • monitor / controlling activities
56 of 57

Just In Time


  • reduce cost of storage
  • cost of finance
  • minimise waste
  • improved cashflow (less money tied up in stock)


  • vulnerable to changes in supply 
  • orders not being met on time
  • restricted if increase in demand
57 of 57


No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all functional areas resources »