Chapter Two – Understanding Financial Objectives

KEY TERM(S) Cost Minimisation

Generally, the higher the percentage value of ROCE
Dividend This strategy involves a business seeking ways to the better the business is doing.
A financial reward to shareholders for their reduce their costs. If costs are reduced, a business
investment in the business. can then either benefit from a higher profit margin Typical objectives for ROCE:
or they can lower their prices and aim to attract
Shareholder more customers.  To increase percentage returns each year
An owner of a company.  To achieve a ROCE value that exceeds that
Examples: of the industry average.
Financial Objectives
The specific, medium to long-term targets of the  Source materials from cheaper suppliers Shareholders’ Returns
financial function within a business.  Reduce wage costs
 Relocate to a cheaper site ‘Least-Cost’ As the owners of the
Financial Strategies  Introduce new technologies to improve business, it is important that a
The medium to long-term plans aimed at achieving efficiency. business seeks to keep
the financial objectives of a business. shareholders happy.
Always consider the potential problems of reducing
Cost Minimisation costs as well as the benefits. If the problems are They will be looking for good
An objective of trying to reduce the costs of a firm greater than the benefits then this is not the right financial returns upon their
so as to improve the businesses financial efficiency. strategy for them! investments in the form of
dividends and for
Types of Financial Objectives Exam Advice evidence that the
Think about if a business with short-term cash business is performing well.
Cash Flow Targets
flow problems could afford to invest in new
technology or the impact that reducing wages or Typical shareholder objectives:
One of the main reasons for even the most profitable
of businesses failing is poor cash flow management. changing suppliers could have upon the quality
of their product or service.  A high dividend per share
It is therefore vital that firms establish clear targets
for themselves to avoid cash flow difficulties.  A rising share price
Return on Capital Employed (ROCE) Targets  High earnings per share
Examples:
ROCE (%) = Operating Profit x 100
 Reduce dependence upon bank overdrafts Capital Employed Exam Advice
 Create a more even spread of sales revenue Always look for specific examples from the case
 Spread out costs more evenly A measure of the profits that are being generated study in the exam and then make sure that you
 Establish a contingency fund on the resources (capital) used in the business. include these in your answers!
 Maintain a minimum cash balance
Chapter Two – Understanding Financial Objectives

Influences Upon Financial Objectives

External
External Influences
Influences

External
External influences
influences are
are those
those factors
factors outside
outside the
the direct
direct control
control of
of an
an
individual
individual business.
business.

The
The state
state of
of the
the economy
economy isis an
an obvious
obvious factor
factor that
that will
will impact
impact upon
upon
the
the financial
financial objectives
objectives of
of aa business.
business. IfIf customers
customers have
have greater
greater levels
levels
of
of PDI then businesses dealing in luxury products and services will do
PDI then businesses dealing in luxury products and services will do
well.
well. AA decline
decline in
in PDI
PDI means
means aa stronger
stronger market
market for
for those
those firms
firms dealing
dealing
with
with staple
staple foods
foods and
and products
products (normal
(normal goods).
goods).

Always
Always remember
remember that
that the
the market
market never
never stands
stands still
still and
and that
that
competitors will attempt to gain your market share, new technologies
competitors will attempt to gain your market share, new technologies
will
will be
be launched,
launched, new
new legal
legal constraints
constraints might
might limit
limit your
your sales
sales etc.
etc.

Internal
Internal Influences
Influences

Internal
Internal influences
influences are
are ultimately
ultimately within
within the
the control
control of
of
the
the business.
business.

The
The corporate
corporate objectives
objectives of
of the
the business
business will
will help
help to
to
establish
establish financial
financial spending
spending priorities
priorities and
and to
to set
set profit
profit
targets
targets for
for different
different products
products and
and departments
departments of of the
the
business.
business. These
These need
need to
to be
be constantly
constantly reviewed
reviewed as as the
the
market
market changes.
changes.

The
The amount
amount of of finance
finance available
available will
will itself
itself act
act as
as an
an
influence
influence as with larger sums available the business can
as with larger sums available the business can
invest
invest in
in efficiency
efficiency saving
saving technologies,
technologies, staff
staff training
training etc.
etc.