Big Picture in Focus: ULOc.

Describe the primary financial objectives

of a business firm.

Metalanguage
For you to demonstrate ULOc, you will need to have an operational understanding
of the following terms below. Please note that you will also be required to refer to
the previous definitions found in ULOa and ULOb section to understand further
ULOc.
Strategic Financial Planning. Involves financial planning, financial forecasting,
provisions of finance and formulation of finance policies which lead the firms’
survival and success.
Strategic or Business Plan. This reflects how it plans to achieve its goals and
objective.
Asset Mix. Refers to the amount of pesos invested in current and fix assets.
Hurdle Rate. The minimum acceptable rate of return.
Working Capital. Refers to the firm’s short-term assets and short-term liabilities.

Essential Knowledge
As the firm is driven towards meeting its goals, the firm must undergo first its strategic
financial planning. The company must make strategic or business plan to help achieve
its success. The company’s strategic plan helps analyse the company’s short-term
and long term financial objectives.

SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES

Short and Medium Term

• Maximization of return on capital employed or return on investment

• Growth in earnings per share and price/earnings ratio through maximization of
net income or profit and adoption of optimum level of leverage.
• Minimization of finance charges.
• Efficient procurement and utilization of short-term, medium-term, and long-term
funds.

Long-Term

• Growth in the market value of the equity share through maximization the firm’s
market share and sustained growth in dividend shareholders.
 • Survival and sustained growth of the firm.

Responsibilities to achieve the financial objectives

Investing
The finance manager is responsible for determining how scarce resources or
funds are committed to projects. The finance manager must allocate the funds wisely
within the firm. This responsibility requires both asset mix and type of assets to hold.
The investment decision should aim at investments in assets only when they are
expected to earn a return greater than the hurdle rate.
The following areas are examples of investing decisions of a financial manager:
a. Evaluation and selection of capital investment proposal.
b. Determination of the total amount of funds that a firm can commit for
investment.
c. Prioritization of investment alternatives.
d. Funds allocation and its rationing.
e. Determination of the levels of investments in working capital.
f. Determination of fixed assets to be required.
g. Asset replacement decision.
h. Purchase or lease decision.
i. Restructuring, reorganization, mergers, and acquisitions.
j. Securities analysis and portfolio management.

Financing
The finance manager is concerned with the ways in which the firm obtains and
manages the financing it needs to support its investments. The financing objectives
asserts that the mix of debts and equity chosen to finance investments should
maximize the value of investments made.
In fund raising decisions, the finance manager should keep in view how and where to
raise money, determination of the debt-equity mix, impact of interest, and inflation
rates on the firm and so forth.

The finance manager will be involved in the following finance decisions:

a. Determination of financing pattern of short-term, medium-term and long-term
funds requirements.
b. Determination of the best capital structure or mixture of debt and equity
financing.
c. Procurement of funds through the issuance of financial instruments such as
equity shares, preference shares, bonds, long-term notes and so forth.
d. Arrangement with bankers, suppliers, and creditors for its working capital,
medium term and other funds requirement.
e. Evaluation of alternative sources of funds.
Operating
This area responsibility of finance manager concerns with working capital
management. Managing the firm’s working capital is a day-to-day responsibility that
ensures that the firm has sufficient resources to continue its operations and avoid
costly interruptions.
Some issues that may have to be resolved in relation to managing the firm’s working
capital are:
a. The level of cash, securities and inventory that should be kept on hand.
b. The credit policy.
c. Source of short-term financing.
d. Financing purchases of goods.

Self-Help: You can also refer to the sources below to help you
further
*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).
Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.

Let’s Check
Questions
1. Explain how the financial managers meet their objectives through establishing a
strategic financial planning.

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2. Based on your own understanding, how strategic plan helps to achieve the firm’s
objectives.
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3. Why is it important to classify the objectives into short-term and long-term

objectives?
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 Let’s Analyze
1. Evaluate the following statement: Managers should not focus on the current on the
current stock value because doing so will lead to an overemphasis on short-term
profits at the expense of long-term profits.
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In a Nutshell
1. The President of Southern Tagalog Corporation made this statement in the
company’s annual report: “STC’s primary goal is to increase the value of common
stockholders equity”. Later in the report. The following announcement were made:
a. The company contributed P1.5 million to the symphony orchestra.
b. The company is spending P500 million to open a new plant and expand
operations. No profits will be depressed during this period versus what
they years, so earning will be depressed during this period versus what
they would have been had the decision been made not to expand.
c. The company holds about half of its assets in the form of government
treasury bonds, and it keeps these funds available for use in
emergencies. In the future, though, STC plans to shift its emergency
funds form treasury bonds to common stocks.
Discuss how STC’s stockholders might view each of these actions and how
the actions might affect the stock price.
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Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

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Keyword Index

Financial objectives
Short term plans