RELATIONSHIP OF FINANCIAL
OBJECTIVES TO
ORGANIZATIONAL STRATEGY
AND OBJECTIVES
CHAPTER 2
Discuss the importance of objective setting in a business
enterprise.
Describe the primary financial objectives of a business
firm.
Explain the responsibilities of a Finance Manager to
achieve the firm’s financial objectives
Understand the nature of environmental (“green”) policies
and their implications for the management of the economy
and the firm.
STRATEGIC FINANCIAL MANAGEMENT
long range in scope and has its focus on the organization
as a whole
involves financial planning, financial forecasting,
provision of finance and formulation of finance policies
strategic financial planning should be able to meet the
challenges and competition, either would lead to failure or
success
The strategic planning should enable the firm to judicious allocation
of funds, capitalization of relative strengths, mitigation of
weaknesses, early identification of shifts in environment, counter
possible actions of competitor, reduction in financing costs, effective
use of funds deployed, timely estimation of funds requirement,
identification of business and financial risk, etc.
While framing financial strategy, shareholders should be considered
as one of the constituents of a group of stakeholders, debenture
holders, banks, financial institutions, government, managers,
employees, suppliers and customers.
The strategic planning should concentrate on multidimensional
objectives like profitability, expansion growth, survival, leadership,
business success, positioning of the firm and reaching global markets
and brand positioning.
Strategic or Business Plan
A plan’s success depends on an effective analysis of market demand
and supply.
Understanding a company’s strategic plan helps focus our analysis of
the company’s short-term and long-term financial objectives by
placing them in proper context
SHORT-TERM AND LONG-TERM FINANCIAL
OBJECTIVES OF A BUSINESS ORGANIZATION
Primary financial objectives:
Short and Medium-Term
Maximization of return on capital employed or return of 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
SHORT-TERM AND LONG-TERM FINANCIAL
OBJECTIVES OF A BUSINESS ORGANIZATION
Primary financial objectives:
Long Term
Growth in the market value of the equity shares through maximization of
the firm’s market share and sustained growth in dividend to shareholders
Survival and sustained growth of the firm
Competing viewpoints:
The owner’s perspective which holds that the only appropriate goal is to maximize
shareholder or owner’s wealth
The stakeholders’ perspective which emphasizes social responsibility over
profitability (stakeholders include not only the owners and shareholders but also
include the business’ customers, employees and local commitments.
Wealth maximization goal is advocated on the following grounds:
It considers the risk and time value of money
It considers all future cash flow, dividends and earnings per share
It suggests the regular and consistent dividend payments to the
shareholders
The financial decisions are taken with a view to improve the capital
appreciation of the share price
Maximization of the firm’s value is reflected in the market price of share
since it depends on shareholder’s expectations regarding profitability,
long-run prospects, timing difference of returns, risk distribution of
returns of the firm.
RESPONSIBILITIES TO ACHIEVE FINANCIAL OBJECTIVES
Investing
Asset mix – refers to the amount of pesos invested in current and fixed assets
The investment decisions should aim at investments in assets only when they
are expected to earn a return greater than a minimum acceptable return
which is also called as hurdle rate.
Investing decisions:
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 (i.e.,
inventory, receivables, cash, marketable securities & its management)
f. Determination of fixed assets to be acquired
g. Asset replacement decisions
h. Purchase or lease decisions
i. Restructuring reorganization mergers and acquisition
j. Securities analysis and portfolio management
Financing
This calls for good knowledge of costs of raising funds, procedures in hedging
risk, different financial instruments and obligation attached to them.
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.
Financing decisions:
a. Determination of the 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, etc
d. Arrangement with bankers , suppliers, and creditors for its working
capital, medium-term and other long-term funds requirement
e. Evaluation of alternative sources of funds
Operating
Working capital management
Working capital – refers to a firm short-term asset and it’s short-term
liabilities
Ensures that the firm has sufficient resources to continue its operations and
avoid costly interruptions. This also involves receipts and disbursements.
Operating decisions:
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
Environmental (“green”) policies and their implications
for the management of the economy and the firm.
