Chapter 1 - Strategic Financial Objectives
Mission fundamental objectives of an entity expressed in general terms.
Mission Statement published statement of these fundamental objectives.
Objectives, hierarchy of arrangement of objectives into different levels, higher levels more
general, lower levels more specific – may be mission, goals, targets, or strategic/tactical/operational
objectives.
Mission and objectives differ depending on type of entity (profit or NFP, list v unlisted etc, as well as
different stakeholder needs.
Profit VS Not-For-Profit objective of a profitable company is to make a profit and satisfy
shareholders by maximising shareholder wealth, but NFP’s primary objectives are often non-
financial, often limited by funds available, secondary objectives are to raise maximum funds and use
efficiently to maximise benefits.
Unincorporated VS Incorporated incorporated means that entity is legally separated from owner,
there are likely to be several owners so risk of conflict of stakeholder objectives. Whereas,
unincorporated is where owner and entity are legally the same so owner bears risk, tends to be sole
traders/partnerships.
Quoted VS Unquoted incorporated companies/organisations can list on the stock exchange,
which can be expensive, can face scrutiny from investors and from the financial market in general –
therefore more important to set non-financial objectives focusing on its relationship with
environment and staff. An unquoted company has no readily available market share price, so
difficult to value and sell shares.
Private sector is owned by private investors VS public sector which is owned by governments.
Charitable entities are NFP’s, but differs from other NFP’s as it centres on philanthropic goals as well
as social well-being, they now raise further funds through trading in retail outlets, seen as risk-taking
to increase returns which would historically be associated with profitable companies.
Associations/unions are a group of individuals that form an entity to accomplish a purpose (trade or
professional associations, trade unions).
Stakeholders persons and entities that are interested in entities strategy, normally shareholders,
customers, suppliers, staff, local community, finance providers, government, managers/directors.
Manager decisions depend on ultimate objectives of the entity, these objectives tend to be
conflicting due to having so many stakeholders with long and short-term interests/goals, making it
difficult to meet all needs, may need to strike a balance that achieves best possible outcome to one
stakeholder with minimum impact on the environment for example. Keeping stakeholders satisfied
will help organisation perform well and boost shareholder wealth in the long-term.
Agency theory: conflicts can arise when ownership is separated from management, as shares are
diversely held and shareholder actions are therefore restricted in terms of practical involvement.
Managers/directors run the entity, but may only have a small share, they are therefore the agents
for the shareholders (known as principals), but often can act in own best interests rather than those
of the shareholders.
For profit entities
,Primary objective is shareholder wealth maximisation, but this must be balanced with other
objectives for other key stakeholders, which will have a mix of financial and non-financial objectives.
Financial objectives need to consider equity investors, they are looking for returns in the form of
dividends and share prices. Finance providers want to see firms’ ability to repay finance including
interest, need to see their ability to generate cash long & short-term. Need to measure risk which
can take many forms, exchange-rate and interest-rate risks can be managed with hedging, so
shareholders can choose the risk they want to bear, directors need to set risk policies to reflect risk
appetite of shareholders.
Targets need to be set to address profitability, dividends, cash generation, and gearing to
communicate direction and measure performance.
Return to investors (P1 less P0) + Dividend / P0 – this represents the capital appreciation of
shares between start and end of year, plus dividends received during the year – share price growth
and dividends are important to investors.
Cash generation poor liquidity is a threat to short-term survival, as they may be unable to pay
salaries and settle its payables, can remedy cash flow problems with borrowing, but may need to
pledge assets.
Value added performance measure defined as revenue less cost of purchased materials and
services, value added to products by own efforts – reflects wealth for employees in salaries, society
at large in taxes, shareholders in dividends and retained earnings. Problem is comparability with
other industries or other competing entities.
Profitability focuses on one output measure and overlooks quality, profitability as a measure of
decision making is criticised due to its failure to outline differences in favourable prospects between
businesses, no insight of dynamics and balance of individual business units, profitability is remote
from actions that create value, and the input to the measure may vary between entities.
Return on Assets an accounting measure – divides annual profits by average NBV of assets, uses
subjective profits rather than actual cash flows, impacted by depreciation policies, inventory
valuation methods, intangible write offs etc. ROA ignores time value of money as no discount factor
is used. May result in overstating performance if using profits but not using those assets used to
generate those profits.
Market share must be judged in context with profitability and shareholder value. Market share
can take quality into account, as market share is unlikely to be obtained with poor quality products.
Acquiring market share should be a long-term aspiration, to ensure outlets for products/services and
minimising competition, but only can be acquired within limits, like if a monopoly situation is to be
avoided.
Competitive position compare performance with competitors to establish a strategic perspective,
need multiple measures to establish the organisations current competitive position, difficulty lies
with collecting and acquiring data from competitors.
Non-financial objectives for Profit entities:
Need to consider employees interests other than just returns (salaries), like security and working
conditions, manager/directors are likely to act in own interest rather than best interest of
shareholders, the importance of supplier needs should be based on their size and number of
suppliers, government has political and financial interests in the firm as well.
,The wider community expect that the company has legal and social responsibilities in the form of
pollution control, employment opportunities, employee welfare etc. Shareholder wealth
maximisation shouldn’t be obtained at the expense of the environment, as still need to produce
environmental reports. Decision makers need to account for customer wishes for the entity to act
ethically, responsibly and sustainably. Also, customers taking their business elsewhere can result in
liquidation, so need to measure customer satisfaction, which is difficult to do, can be achieved
through surveys and questionnaires but their reliability is limited.
Non-financial objectives direct manager attention towards key stakeholder requirements to
balance needs and minimise conflict, these NFO’s can improve perceived image of entity, impacting
sales and profitability and create further shareholder wealth.
Human – relationship of entity with staff, objectives to increase training or reduce turnover.
Intellectual – intangible assets, aim to improve brand awareness or improve efficiency of
internal processes.
Natural – entity responsibility to the environment, objective to reduce pollution or increase
recycling.
Social – entity responsibility to local community, objective to increase local jobs, or ensure
employees live locally.
Relationship – entity responsibility towards key stakeholders like suppliers and customers,
objectives for this could be to ensure prompt payment to suppliers for example.
Not for profit entities
Can measure NFP’s through value for money generated (VFM). NFP’s will have a mix of financial and
non-financial objectives, due to the different views of what NFP objectives should be, they are in the
public sector to address societal matters rather than being left to competitive markets to address.
Public sector entities are bodies like nationalised industries and local governments, they represent
countries economies, and need sound financial management, main problem is identifying a
measurable objective. The NFP’s entity will lay out its key objectives within its mission statement,
need to attain the position where gap between society benefits and costs of operation is most
favourable. The cost can be measured in accounting terms, but these benefits are intangible.
Regulations apply to ensure the public are not victim to monopolisation, can be to cap selling prices,
tax super profits, limit profits etc.
Common objectives for public sector entities:
Budgetary compliance – budgets set by governments, entity needs to meet these targets for
long-term survival, and to control costs, set targets and assess performance.
Cash generation – can borrow to fund growth or need good cash generation, NFP’s now face
same choice of finance options (except for equity) as profit making entities, through local
authorities and other public sector entities.
Value added – again, issue is comparing the value added to its product/services within or
between industries, but other NFP’s now publish their own info on value added.
Profitability – not entirely present in the conventional sense, but can be used to link inputs
to outputs.
ROA – profit is again absent, but should use donated assets with maximum efficiency. ROA
may be tricky in public sector as difficult to determine values, may be no resale value, are
used by community, depreciation charges may result in double taxation on the taxpayer.
, Market share – is relevant to public sector as providers need to succeed in their services to
customers to retain market share and trust.
Competitive position – competing with other providers of a similar service throughout
private and public sector, but is easier to obtain data than it is for private sector.
Risk exposure – tend to be risk averse due to political repercussions of failure, they also do
not have the surplus funds to invest money in risky ventures.
VFM – performance of an activity in such a way as to simultaneously achieve economy, efficiency
and effectiveness. Optimum use of resources to achieve best outcome. Economy is minimising the
costs of inputs. Efficiency is using those inputs for best outputs (spending well – inputs vs outputs).
Effectiveness is the relationship between intended and actual results (spending wisely, focus on
outputs). “COST EFFECTIVENESS”. 4th E is EQUITY, the extent of services being available to reach all
people as intended or needed (spending fairly).
VFM is difficult to measure, it is relative rather than absolute. Should conduct a VFM audit which
investigates whether proper arrangements are in place to secure these 3 E’s in the use of resources.
A VFM study focuses on one area of expenditure, and reaches a judgement on whether VFM was
achieved, provides independent and rigorous analysis on the way moneys have been spent to
achieve objectives.
VFM studies make recommendations on achieving better VFM, can conduct follow-up study to
measure progress against these recommendations. Studies use quantitative and qualitative
methods, including financial analysis, management info analysis, internal interview/focus groups of
staff and departments, general research, service user surveys, benchmarking with other
organisations and countries.
VFM audits usually focus on either just effectiveness (outputs only), or economy and efficiency
together (inputs only, and inputs vs outputs), due to conflicts between two side of VFM. Can have a
better service which improves quality of outcomes/outputs (effectiveness), but will reduce economy
(inputs).
International operations
Entities are expanding across national boundaries into different countries, which poses risks but also
potentially enormous benefits. Objectives of international entities are likely to be similar to just
national entities, but with additional considerations:
Competition foreign markets may have weaker competition (may be a monopoly), compared to
domestic markets where competition may be high.
Country factors other countries may have cheaper materials and labour producing cost savings,
governments may offer grants and cheap loans to incentivise foreign investment.
Customer benefits may bring closer to customers, reducing delivery times and improving
relationships, opens up opportunity for new pool of customers.
Economies of scale international expansion to continue generating economies of scale.
Risk management spreads risk so less exposed to just one economy, where factors like interest
rates, inflation, government policies, exchange rates etc may fluctuate across countries.
International expansion may appear an attractive project due to positive NPV projections, but can
have financial implications on the financial statement due to converting to domestic currencies and
