Understanding financial objectives

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What are financial objectives?

  • Financial objectives are the goals or targets a business sets itself for its financial performance
  • Financial targets are likely to be more challenging
  • Larger businesses are likely to employ a team of accountants to help set financial targets
  • Financial objectives may relate to:
  • Cash flow targets;
  • Cost minimisation;
  • Return on capital employed;
  • Shareholders' return
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Cash flow Targets

  • Cash flow of a business is the money flowing into and out of the business
  • Financial managers must ensure that the business has enough cash when it is needed
  • Cash flow forecasts will be produced to help plan the future cash position of the business
  • Advantages of setting cashflow targets is that the business is less likely to run out of cash
  • Targets might relate to the need for cash at particular times of the trading year
  • Businesses can set monthly cash flow targets. This might be part of their budgeting procedure
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Cost minimisation

  • Most businesses will make an effort to reduce costs
  • Costs are lower then profits will be higher
  • Examples of reducing costs include:
  • Reducing waste by recycling;
  • Reducing staffing levels through automation;
  • Adopting lean production techniques;
  • Closing down unprofitable activities;
  • Finding cheaper suppliers;
  • Reorganisation;
  • Outsourcing activities
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Return on capital employed (ROCE)

  • ROCE is the amount of profit a business generates in relation to the amount of money invested in that business.
  • ROCE is likely to be of particular interest to the owners of the business
  • ROCE = PROFIT/CAPITAL EMPLOYED X 100
  • Can be used to make comparisons over time or between different companies
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Shareholders' returns

  • Financial objectives can be influenced by the shareholders in a company
  • Shareholders are the owners of a company
  • Dividend per share - The dividend per share is the amount of money a shareholder is paid for every share owned.
  • Doesn't provide an accurate measure of the returns to shareholders
  • This is because the dividend per share must be compared with the price of the share
  • Dividend yield - The dividend yield is the dividend per share expressed as a percentage of the share price.
  • DIVIDEND YIELD = DIVDEND PER SHARE / SHARE PRICE X 100
  • A company might set targets for the dividend yield
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Internal influences on financial objectives

  • Stakeholders - the financial objectives set by a business are likely to be influenced by the stakeholders. It is likely that the strongest stakeholder group will have the most influence over the objectives.
  • Capacity - There is usually a limit to the amount a business can produce. Consequently this might act as a constraint on financial objectives.
  • Coporate strategy - Financial objectives are likely to be linked to the coporate strategy of a business.
  • Departmental influence - Many large businesses are organised into departments or divisions. In these circumstances particular departments might influence financial objectives.
  • Ethical stance - Some companies want to be seen as good corporate citizens. Consequently financial objectives may be less of a priority.
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External influences on financial objectives

  • Economic climate - If the economy is stable and growing at a sustainable rate a business is likely to have more choice when setting financial objectives. However, if the economic climate is poor a business may have less control.
  • Competition - The activities of rival businesses can have an impact on financial objectives
  • Consumer tastes - Changes in market conditions brought about by a shift in consumer tastes can affect the financial objectives set by a business.
  • Political factors - A change in government
  • Legislation - Quite a lot of government legislation is aimed at businesses. Generally, more legislation means extra costs which may dampen profits.
  • Pressure groups - Pressure groups such as Greenpeace, for example, may persuade companies to focus more on environmental objectives.
  • World events - Rising global oil prices may force companies that are heavily reliant on oil as raw material to downgrade financial objectives.
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KEYTERMS

  • Dividend per share - the amount of money received by a shareholder for every share owned.
  • Dividend yield - The amount recieved by a shareholder as percentage of the current share price.
  • Financial objectives - the goals or targets a business sets itself for its financial performance.
  • Total shareholder's return (TSR) - A financial return which takes into account both the increase in the share price and the dividend paid.
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