- Created by: hayden Francis
- Created on: 05-06-14 12:00
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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- 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;
- 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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- 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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- 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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