3.2 understanding financial objectives
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A2 Unit 3:A2 Unit 3:Strategies for Strategies for
successsuccess
3.2 Understanding 3.2 Understanding financial objectivesfinancial objectives
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What are financial What are financial objectives?objectives?An objective of a business is an outcome which allows a business to achieve its aims
Objectives should be SMART:
•Specific
•Measurable
•Agreed
•Realistic
•Time specific
Financial objectives are the goals or targets a business sets itself for its financial performance
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Typical financial objectives
Cash flow targets
Cash flow targets
Cost minimisatio
n
Cost minimisatio
n
Return on capital
employed
Return on capital
employedShareholders’ returns
Shareholders’ returns
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Cash flow targetsCash flow targets
Without cash a business is likely to face failure
• it needs to pay its bills
• it may need cash at particular times of the trading year – for example for investment / capital expenditure
Cash flow targets ensure that a business has enough cash when it is needed
See this example
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Cost minimisationCost minimisation
Reducing costs is a way of raising profits
There are, obviously, lots of ways of reducing costs:
• reducing waste by recycling
• reducing staff levels by automation
• adopting lean production methods
• closing down unprofitable activities
• finding cheaper suppliers
• reorganisation
• outsourcing
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Investigation task:1. Find out how British
Airways plans to reduce its costs by £450 million
2.Why has it set itself this objective?
3.Are there any disadvantages of the
objective?
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Return on capital employedReturn on capital employed
ROCE is the amount of profit a business generates in relation to the amount of money invested in the business
ROCE is of particular interest to the owners of the business
• they have probably invested the most money!
Objectives might be
• to increase ROCE over time
• to match or exceed the ROCE of other businesses in the same industry
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Task:Complete the ROCE task
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Shareholders’ returnsShareholders’ returns
Financial objectives are often influenced by shareholders’ interests
Shareholders might be interested in
• dividend per share
- the amount of profit paid to shareholders per share
• dividend yield
- dividend paid can be misleading – it must be related to the price of the share
= (dividend per share / share price) x 100
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Shareholders’ returnsShareholders’ returns
Financial objectives are often influenced by shareholders’ interests
Dividend per share:
amount of profit paid to
shareholders per share
Dividend per share:
amount of profit paid to
shareholders per share
Dividend yield:(dividend per share / share price) x 100
Dividend yield:(dividend per share / share price) x 100
Total shareholder return (TSR):combines dividend
paid and share price increase
Total shareholder return (TSR):combines dividend
paid and share price increase
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Investigation task:1.Find out BT’s TSR over
the last five years
2.To what extent has BT delivered a satisfactory
return to its shareholders?
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Influences on financial Influences on financial objectivesobjectivesThe financial objectives set by a business are affected by
• internal factors
• external factors
These factors may pull the business in different directions
• which factor (s) exerts the strongest influence will vary over time
• external factors can be particularly significant as they are outside the control of the business
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Internal influences
Stakeholders
Stakeholders
CapacityCapacity
Departmental influence
Departmental influence
Corporate strategy
Corporate strategy
Ethical stanceEthical stance
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External influences
Economic climate
Economic climate
Competition
Competition
Political factors
Political factors
Consumer tastes
Consumer tastes
Legislation
Legislation
World eventsWorld events
Pressure groups
Pressure groups
Population trends
Population trends
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Use the BBC Business website to identify a
range of factors which might influence airlines’
financial objectives
Start with this article Airlines seek safe berth in storm
Investigation task 1Investigation task 1
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Read the Business Cafe article (‘Can Sony’s New
Strategy Deliver the Goods?’) and answer the
questions on the worksheet
Investigation task 2Investigation task 2
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HomeworkHomework
1. Complete the task on Cygnus Business Media and hand in for assessment next lesson.
2. Read the Case Study on ‘Case Alarm Systems’ and answer questions (a), (b), (c) and (d)