Course Code and Title: FINP1 - Financial Management

Lesson Number: 2
Topic: Relationship of Financial Objectives to Organizational Strategy and Other
Organizational Objectives
Learning Objectives:
After studying Chapter 2, you should be able to:
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
[
Pre-assessment:

Write T if the statement is true and F if the statement is false.

_____1. Setting objectives in an organization is important to company’s success.

_____2. Planning organization objectives doesn’t require planning.
_____3. The responsibility of the finance manager is to provide a basis and information for
strategic positioning of the firm in the industry.
_____4. Objectives can be long-term or short-term
_____5. Various environmental (green) policies are not needed in organizations.
 CHAPTER 2
RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL STRATEGY AND
OTHER ORGANIZATIONAL OBJECTIVES
INTRODUCTION
At one time or another, most people have had occasion to hire agents to take care of a
specific matter. In doing so, responsibility is delegated to another person. For example, when
suing for damages, individuals may represent themselves or may hire a lawyer to plead their
case in court. As an agent, the lawyer is given the assignment to get the highest possible
award. And so, it is with shareholders when they delegate the task of running a firm to a
financial manager who acts as an agent of the company. Obviously, the goal is to achieve the
highest value of an equity share for the firm's owners. But there are no standard rules that
indicate which course of action should be followed by managers to achieve this. The ultimate
guideline is how investors perceive the actions of managers. A good way to motivate managers
is to offer them lucrative share options linked to performance.
Finance permeates the entire business organization by providing guidance for the firm's
strategic (long-term) and day-to-day decisions. For long range planning and management
control, a business firm establishes its overall objectives. Such objectives are developed by the
top management and the the company expects to achieve.
Objective setting is thus, an important phase in the business enterprise since upon
correct objectivy usually consist of general statement or a series of statements in general terms
stating whates setting will the entire structure of the strategies, policies and plans of a company
rest. Firms have numerous goals but not every goal can be attained without causing conflict in
reaching other goals. Conflicts often arise because of the firm's many constituents who include
shareholders, managers, employees, labor unions, customers, creditors, and suppliers. There
are those who claim that the firm's goal is to maximize sales or market share; others believe the
role of business is to provide quality products and service; still others feel that the firm has a
responsibility for the welfare of society at large. For example, the objective may be stated in
such broad terms as:

 It is the goal of the company to be a leader in technology in the industry, or

 To achieve profits through a high-level manufacturing efficiency, or
 To achieve a high degree of customer satisfaction.
For the purpose though of measuring performance and degree of control, it is necessary
to set objectives or goal in more precise terms. The 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 planning is long-range in scope and has its focus on the organization as a
whole. The concept is based on an objective and comprehensive assessment of the present
situation of the organization and the setting up of targets to be achieved in the context of an
intelligent and knowledgeable anticipation of changes in the environment. The 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 financial planning should be able to
meet the challenges and competition, and it would lead to firm's failure or success.
The strategic financial 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, and so forth.
The strategic financial planning is likewise needed to counter the uncertain and
imperfect market conditions and highly competitive business environment. 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, reaching global markets and brand positioning. The financial
policy requires the deployment of firm’s resources for achieving the corporate strategic
objectives. The policy should align with the company's planning. It allows the firm in overcoming
its weaknesses, enables the firm to maximize the utilization of its competencies and to direct the
prospective business opportunities and threats to its advantage. Therefore, the finance manager
should take the investment and finance decisions in consonance with the corporate strategy.
A company's strategic or business plan reflects how it plans to achieve its goals and
objectives. A plan's success depends on an effective analysis of market demand and supply.
Specifically, a company must assess demand for its products and services, and assess the
supply of its inputs (both labor and capital). The plan must also include competitive analyses,
opportunity assessments and consideration of business threats.
Historical financial statements provide insight into the success of a company's strategic
plan and are an important input of the planning process. These statements highlight portions of
the strategic plan that proved profitable and, thus, warrant additional capital investment. They
also reveal areas that are less effective and provide information to help managers develop
remedial action.
Once strategic adjustments are planned and implemented, the resulting financial
statements provide input into the planning process for the following year, and this process
begins again. 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
Among are the primary financial objectives of a firm are the following:
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
There have been a number of different, well-developed viewpoints concerning what the
primary financial objectives of the business firm should be. The competing viewpoints are:

 The owner's perspective which holds that the only appropriate goal is to maximize
shareholder or owner 's wealth, and;
 The stakeholders' perspective which emphasizes social responsibility over profitability
(stakeholders include not only the owners and shareholders, but also include the
business's customers, employees and local commitments).
While strong arguments speak in favor of both perspectives, financial practitioners and
academics now tend to believe that the manager's primary responsibility should be to maximize
shareholder's wealth and give only secondary consideration to other stakeholders' welfare.
Adam Smith, an 18th century economist was one of the first and well-known proponent of
this viewpoint. He argued that, in .capitalism, an individual pursuing his own interest tends also
to promote the good of his community. He also pointed out that acting through competition and
the free price system, only those activities most efficient and beneficial to society as a whole
would survive in the long run. Thus, those same activities would also profit the individual most.
Owners of the firm hire managers to work on their behalf, so the manager is morally, ethically;
and legally required to act in the owners' best interests. Any relationships between the manager
and other firm stakeholders are necessarily secondary to the objective that shareholders give to
their hired managers.
The financial manager must have some goals or objectives to guide decision involving the
management of the firm's assets. liabilities and equity. Hence, priorities must be set to resolve
conflicting goals.
To reiterate, the primary financial goal of the firm is to maximize the wealth of its existing
shareholders or owners. Therefore, the overriding premise of financial management is that the
firm should be managed to enhance owner(s) well-being. Shareholder's wealth depends on both
the dividends paid and the market price of the equity shares. Wealth is maximized by providing
the shareholders with the target attainable combination of dividends per share and share price
appreciation. While this may not be a perfect measure of shareholders' wealth, it is considered
one of the best available measures.
The 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 pric
  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
Critics of the wealth maximization objective however say that, this objective is narrow and
ignores the concept of wealth maximization of society since society's resources are used to the
advantage only of a particular firm. The optimal allocation of the society's resources should
result in capital formation and growth of the economy which should ultimately lead to
maximization of economic welfare of the society.
RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES
INVESTING
The finance manager is responsible for determining how scarce resources or funds are
committed to projects. The investing function deals with managing the firm's assets. Because
the firm has numerous alternative uses of funds, the financial manager strives to allocate funds
wisely within the firm. This task requires both the mix and type of assets to hold. The 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. This
minimum return should consider whether the money raised from debt or equity meets the
returns on investments made elsewhere on similar investments.
The following areas are 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 (i.e. inventory, receivables,
cash, marketable securities and 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
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.
Financing decisions call 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 the money, determination of
the debt-equity mix, impact of interest, and inflation rates on the firm, and so forth.
The finance manager will be involved in the following finance 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
c. financing
d. Procurement of funds through the issuance of financial instruments such as equity
shares, preference shares, bonds, long-term notes, and so forth
e. Arrangement with bankers, suppliers, and creditors for its working capital, medium-term
and other long-term funds requirement
f. Evaluation of alternative sources of funds
OPERATING
This third responsibility area of the finance manager concerns working capital
management. 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. This also involves a number of activities related to the firm's receipts and
disbursements of cash.
Some issues that may have to be resolved in relation to managing a firm's working capital are:
a. The level of cash, securities and inventory that should be kept on hand
b. The credit policy (i.e., should the sell on credit? If so, what terms should be extended?)
c. Source of short-term financing (i.e., if the firm would borrow in the short term, how and
where should it borrow?)
d. Financing purchases of goods (i.e., should the firm purchase its raw materials or'
merchandise on credit or should it borrow in the 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? In recent years,
people have increasingly turned to the government to achieve additional environmental
improvements, Sometimes, people turned to government because property rights failed to hold
polluters accountable for the costs they were imposing on others. In these "external cost cases",
government may be able to improve accountability and protect rights more efficiently by
regulation, In other instances, people with strong desires for various environmental amenities
(for example, green spaces, hiking trails and wilderness lands) want the government to force
others to help pay for them.
Courts help owners protect their property against invasions by others, including
polluters. In some cases however, it is difficult — if not impossible — to define, establish and
fully protect property rights. This is particularly true when there is either a large number of
polluters or a large number of people harmed by the emissions, or both. In these large numbers
of cases, high transaction costs undermine the effectiveness of the property rights — market
exchange approach. For example, consider the air quality in a large city such as Manila or
Quezon City. Millions of people are harmed when pollutants are put into the air. But millions of
people also contribute to the pollution as they drive their cars. Property rights alone will be
unable to handle large-number cases like this efficiently. More direct regulations may generate a
better outcome.
 Although government regulation is an alternative method of protecting the environment,
the regulatory approach also has a number of deficiencies. First, government regulation is often
sought precisely because the harms are uncertain and the source of the problem cannot be
demonstrated, so relief from the courts is difficult to obtain. But when the harms are uncertain,
so are the benefits of reducing them. Second, by its very nature, regulation overrides or ignores
the information and incentives provided by market signals. Accountability of regulators for the
costs they impose is lacking, just as accountability for polluters is missing in the market sector
when secure and tradable property rights are not in place. The tunnel vision of regulators, each
assigned to oversee a small part of the economy, is not properly constrained by readily
observable costs. Third, regulation allows special interests to use political power to achieve
objectives that may be quite different from the environmental goals originally announced. The
global warming issue illustrates all of these problems and the uncertainties that they generate.
People turn to government to get what they cannot get in markets. In many cases, they
are seeking to get what they want with a subsidy from others. 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. Government can indeed shift the cost of services
from some citizens to others, and can do the same with benefits from its programs. There is little
reason, however, to expect a net increase in efficiency when the government steps in. That is
true in environmental matters, as well as in many other areas of citizen concern.
When it is difficult to assign and enforce private property rights, markets often result in
outcomes that are inefficient. This is often the case when large numbers of people engage in
actions that impose harm on others. Government regulation has some premise but also poses
some problems of its own.
Global warming could exert a sizeable adverse impact on human welfare, but there is
considerable uncertainty about both its cause and the potential gains that might be derived from
regulations such as those of the Kyoto treaty. Global temperature changes have been observed
previously. We do not know that the current warming is the result of human activity. We do not
even know whether on balance, a warming would exert an adverse impact. These uncertainties
increase the attractiveness of adaptation as an option to regulation.
Market-like schemes can reduce the costs of reaching a chosen environment goal, but
the programs provide little help in choosing the right goal.
Government ownership of national parks, as with other lands, has brought troublesome
results along with benefits, but there seems to be progress in moving closer to market solutions
that provide better information and incentives for government managers.
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.
Can companies be socially responsible and oriented toward shareholder wealth at the same
time? Many businessmen think so and so do most big business establishments that they have
adopted well-laid environmental-saving strategies that can observe such as recycling programs,
pollution control, tree-planting activities and so forth. The benefits come a little at a time but one
can be sure they will add up. 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.
Activity:
Write T if the statement is true and F if the statement is false.

__T___1. Strategic planning is long-range in scope and focuses on the organization as a whole.
__F___2. A company’s strategic or business plan does not reflect how it plans to achieve its
goals and objectives.
__T___3. Historical financial statements provide insight into the success of a company’s
strategic plan and are an important input of the planning process.
__T___4. The financial manager must have some goals and objectives to guide decisions
involving the management of the firm assets.
__F___5. Working capital refers to firm’s long-term assets.

Reinforcement:
Choose the letter of the best answer:

1. The following are example of objective of a firm except:

a. To be leader in the industry
b. To achieve profits through a high-level manufacturing efficiency
c. To be your ultimate best
d. To achieve a high degree of customer satisfaction.
2. This is an important phase in the business enterprise for the entire structure of the
strategies, policies and plans of a company rest.
a. Physical setting
b. Objective setting
c. Macro setting
d. Environmental setting
3. Statement 1: There will be no conflicts when the firm sets its own goals.
Statement 2: It is not necessary to set goals or objectives in a firm
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
4. One of the following is not included in the scope of strategic financial planning:
a. Financial planning
b. Financial forecasting
c. Formulation of policies
d. Formulation of hypothesis
5. Statement 1: It is a responsibility of a finance manager to provide a basis and
information for strategic position of the firm in the industry.
Statement 2: The firm’s strategic financial planning should be able to meet the
challenges and competition that may lead to firm’s failure or success
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
 d. Both statements are False
6. Statement 1: Strategic financial pla nning is needed to counter market uncertainties
and highly competitive business environment.
Statement 2: Strategic financial planning should enable the firm to mitigate different
kinds of risk.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
7. Statement 1: A company’s strategic or business plan reflects how it plans to achieve its
goals and objectives.
Statement 2: Historical financial statements is not needed in a strategic plan.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
8. Who is the father of capitalism?
a. Sam Smith
b. Adam Smith
c. Will Smith
d. Curtis Smith
9. The following statements are true in capitalism, except for one:
a. An individual pursuing his own interest tends also to promote the good of his
community.
b. Competition and the free price system are beneficial to society as a whole world
survive in the long run.
c. There are only select individuals who have control of the market prices.
d. Minimal government intervention is exhibited.
10. Statement 1: The investing function deals with managing the managing the firm’s assets
Statement 2: The operating function refers to working capital management where this
involves both short-term and long-term assets.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False