A2 Unit 3:A2 Unit 3:Strategies for Strategies for

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3.2 Understanding 3.2 Understanding financial objectivesfinancial objectives

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

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

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

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

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?

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

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

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

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?

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

Internal influences

Stakeholders

Stakeholders

CapacityCapacity

Departmental influence

Departmental influence

Corporate strategy

Corporate strategy

Ethical stanceEthical stance

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

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

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

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)