Relationship of Financial Objectives to

Organizational Strategy and Other

Organizational Objectives
(Financial Management 1)
2nd Trimester, AY 2020-2021
 Relationship of Financial Objectives to
Organizational Strategy and Other
Organizational Objectives
Learning Outcomes:
1. Discuss the importance of objective setting in a business
enterprise.
2. Describe the primary financial objectives of a business firm.
3. Explain the responsibilities of a Finance Manager to achieve
the firm’s financial objectives.
4. Understand the nature of environmental (green) policies
and their implications for the management of the economy
and firm.
 Introduction
• As delegated by the shareholders, the finance manager acts
an agent of the company with task of running the firm.
• But there are no standard rules that indicate which course of
action should be followed by managers to achieve this.
• Managers are motivated by getting lucrative share options
linked to their performance.
• A business firm’s overall objectives are developed by top
management stating what the company expects to achieve.
• Objectives are usually in quantitative terms and are set within
a time frame.
• The setting of physical targets to be accomplished within a
set time period would provide the basis of conversion of the
targets into financial objectives.
 Strategic Financial Management
• Strategic financial planning involves financial planning, financial
forecasting, provision of finance and formulation of finance policies
which should lead the firm’s survival and success.
• The responsibility of a finance manager is to provide a basis and
information for strategic positioning of the firm in the industry.
• The firm’s strategic planning should:
– be able to meet challenges and competition and it would lead
to firm’s failure or success
– 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.
 Strategic Financial Management
• The strategic financial planning is likewise needed to counter the
uncertain and imperfect market conditions and highly competitive
business environment.
• It should concentrate on multidimensional objectives like
profitability, expansion growth, survival, leadership, business
success, positioning of the firm, reaching global markets and brand
positioning.
• Therefore, the finance manager should take the investment and
finance decisions in consonance with the corporate strategy.
 Financial Objectives of a Business Organization
(Short Term & Long Term)

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 shares through maximization
of the firm’s market share and sustained growth in dividend to
shareholders.
• Survival and sustained growth of the firm.
 Wealth Maximization Goal
• 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 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 the
Financial Objectives
INVESTING
• The finance manager is responsible for determining how scarce
resources are committed to projects.
• Since the firm has numerous alternative uses of funds, the financial
manager strives to allocate funds wisely within the firm through
asset mix.
• 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.
 Responsibilities to Achieve the
Financial Objectives
INVESTING
Examples of Investing Decisions of a Finance 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 acquired
g. Asset replacement decisions
h. Purchase or lease decisions
i. Restructuring reorganization mergers and acquisition
j. Securities analysis and portfolio management
 Responsibilities to Achieve the
Financial Objectives
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 objective asserts that the mix of debt 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.
 Responsibilities to Achieve the
Financial Objectives
FINANCING
Finance Decisions of a Finance Manager
a. Determination of the financing pattern of short-term, medium-term and
long term-fund 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.
d. Arrangement with bankers, suppliers, and creditor for its working capital,
medium term and other long-term funds requirement
e. Evaluation of alternative sources of funds
 Responsibilities to Achieve the
Financial Objectives
OPERATING
• This responsibility area of the finance manager concerns working
capital.
• The term working capital refers to a firm short-term asset (i.e.,
inventory, receivables, cash and short term investments) and its
short-term liabilities (i.e., accounts payable, short term loans).
• 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.
 Responsibilities to Achieve the
Financial Objectives
OPERATING

Issues in Managing a Firm’s Working Capital

a. The level of cash, securities and inventory that should be kept on hand
b. The credit policy (firm to sell on credit? on what terms should be
extended?)
c. Source of short-term financing (if firm borrow in short term, how and
where should it borrow?)
d. Financing purchases of goods ( should the firm purchase its raw
materials or merchandise on credit or should it borrow in short term and
pay cash?
 Environmental “Green” Policies and their
Implications for the Management of the
Economy and Firm
• Private property rights can promote prosperity and cooperation and
at the same time protect the environment, but do they protect the
environment sufficiently?
• People turned to government because property rights failed to hold
polluters accountable for the costs they were imposing on others.
• Courts help owners protect their property against invasions by
others, including polluters.
• In some cases however it is difficult to define and fully protect
property rights.
• Example the air quality in Manila or Quezon City where millions of
people are harmed by pollutants, but these people also contribute
to pollution as they drive their cars.
 Environmental “Green” Policies and their
Implications for the Management of the
Economy and Firm
• Government can provide protection from harms as in regulation
that reduces pollution or production of goods and services, as in
the provision of national parks.
• Global warming could exert a sizeable adverse impact on human
welfare, but there is considerable uncertainty about its cause and
potential gains that might be derived from regulations such as
those of the Kyoto Treaty.
• Given that stock market investors emphasize financial results and
the maximization of shareholder value, one can wonder if it makes
sense for a company to be socially responsible.
• If an investor wants wealth maximization, management that
minimizes wastes might do the other little things right that make a
company well-run and profitable.
OPEN FORUM

•QUESTIONS????
•REACTIONS!!!!!
END OF PRESENTATION