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3.2 understanding financial objectives
1. A2 Unit 3:A2 Unit 3:
Strategies for successStrategies for success
3.2 Understanding3.2 Understanding
financial objectivesfinancial objectives
2. What are financial objectives?What are financial 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
3. Typical financial objectives
Cash flow
targets
Cash flow
targets
Cost
minimisation
Cost
minimisation
Return on
capital
employed
Return on
capital
employedShareholders’
returns
Shareholders’
returns
4. 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
5. 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
6. 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?
7. 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
9. 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
10. 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
11. 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?
12. Influences on financialInfluences on financial
objectivesobjectives
The 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
15. 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
16. 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
17. 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)
