Chapter 2 notes - BUSS3 - Understanding financial objectives - A2 AQA Business Studies Unit 3

CHAPTER 2                      UNDERSTANDING THE FINANCIAL OBJECTIVES

Types of financial objective

Cash-flow targets:

ü  Maintain a minimum closing monthly cash balance

ü  Reducing the bank overdraft by a certain amount by the end of the year

ü  Creating a more even spread of sales revenue

ü  Spreading its costs more evenly

ü  Achieving a certain level of liquid, non-cash items

ü  Raising certain levels of cash at a particular point in time

ü  Setting contingency fund levels

Cost minimisation

A business that reduces its costs can benefit in two ways:

o   Keep price the same and have higher profit margins

o   Reduce the price so that can attract more customers

Examples of cost minimisation objectives include:

ü  Achieving a certain cost reduction in the purchase of raw materials

ü  Reducing wage costs per unit

ü  Lowering wastage levels

ü  Relocating to a “least-cost” site

ü  Reducing the cost per thousand customers (CPT) of the business’s promotion and advertising

ü  Improving the efficiency of production by reducing variable costs per unit

However, reducing costs can mean: lower quality, replacing of staff, high short-term cost

ROCE targets

Success of a business is demonstrated by the profit levels, and the size of the business.

Capital employed: the measure of the value of the resources used by a company.

ROCE (%) =  Operating profit ÷ capital employed    X 100

Three types of ROCE objectives:

ü  Achieve a ROCE that exceeds the level recorded in the previous year by a %

ü  Achieve a ROCE that compares favourably with the average ROCE achieved in the UK

ü  Achieve a ROCE that exceeds the level of a particular competitor or group of competitors

Shareholders’ returns

A business must satisfy the needs of its owners/shareholders

Examples of objectives that meet shareholders’ needs are:

ü  A high dividend per share

ü  A high dividend yield

ü  Increasing the share price

ü  High earnings per share

Other financial objectives:

ü  Sales maximisation

ü  Liquidity and gearing targets

ü  Financial objectives for individual projects – (e.g. payback period)

ü  Financial efficiency targets

Reasons for setting financial objectives:

v  Act as a focus for decision making

v  Provide something to measure your success against

v  Improve efficiency

v  Improve coordination – common purpose

v  Allow shareholders to assess whether the business is going to provide a worthwhile investment

v  Enable outside organisations to see the financial viability of the business.

Assessing internal influences on financial objectives:

Ø  Corporate objectives

Ø  Finance – money makes money

Ø  HR – efforts, skills, recruitment, training, profitability

Ø  Operational – efficiency, quality, cost

Ø  Resources available – premises, brand names, quality

Ø  Nature of the product

Assessing external influences on financial objectives:

Ø  Political

Ø  Economic - recession

Ø  Social – expectations, trends

Ø  Technological

Ø  Legal

Ø  Environmental

Ø  Market

Ø  Competitors

Ø  Suppliers