Lesson 2: Relationship of Financial Objectives to Organizational Strategy and

Objectives

Learning Objective

After studying Lesson 2, you should be able to:

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 firm.

Introduction

At one time or another, most people have needed to hire agents to take care of a specific matter. In doing
so, responsibility is delegated to another person. 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 guiding the firm's strategic (long-term) and day-
to-day decisions. A business firm establishes its overall objectives for long-range planning and management
control. Objective setting is an important phase in the business enterprise since correct objective setting will the
entire structure of strategies, policies, and plans of a company rest.

STRATEGIC FINANCIAL MANAGEMENT

Strategic planning is a 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 a 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 to the firm’s survival and success.

The responsibility of the finance manager is to provide a basis and information for the 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 the firm's failure or success.
The financial policy requires the deployment of the firm's resources for achieving the corporate strategic
objectives. The financial policy should align with the company's strategic planning. It allows the firm to
overcome its weaknesses, enables the firm to maximize the utilization of its competencies and direct the
prospective business opportunities and threats to its advantage.

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. The plan must include competitive
analysis, opportunity assessments, and consideration of business threats.

SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES OF A BUSINESS ORGANIZATION

Among 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

The financial manager must have some goals or objectives to guide decisions involving the management
of the firm's assets, liabilities, and equity. Hence, priorities must be set to resolve conflicting goals.

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 regular and consistent dividend payments to the shareholders.
 The financial decisions are taken to improve the capital appreciation of the share price.
 Maximization of a firm's value is reflected in the market price of shares since it depends on shareholder's
expectations regarding profitability, long-run prospects, timing difference of returns, and risk distribution
of returns of the firm.
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. 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 a hurdle rate.

The following areas are examples of investing decisions of a finance manager:

 Evaluation and selection of capital investment proposal

 Determination of the total amount of funds that a firm can commit to investment
 Prioritization of investment alternatives
 Funds allocation and its rationing
 Determination of fixed assets to be acquired
 Asset replacement decisions
 Purchase or lease decisions

Financing

The finance manager is concerned with how the firm obtains and manages the financing it needs to
support its investments. The financing decisions call for good knowledge of the costs of raising funds, different
financial instruments, and the obligations attached to them. The finance manager should keep in view how and
where to raise the money, the determination of the debt-equity mix, impact of interest and inflation rates on the
firm.

The finance manager will be involved in the following finance decisions:

 Determination of the financing pattern of short-term, medium-term, and long-term funds requirements
 Determination of the best capital structure or mixture of debt and equity financing
 Procurement of funds through the issuance of financial instruments such as equity shares, preference
shares, bonds, long-term notes, etc.
 Arrangement with bankers, suppliers, and creditors for its working capital, medium and other long-term
funds requirement
 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 assets (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 several activities related to the firm’s receipts and disbursements of cash.

Some issues that may have been resolved concerning managing a firm’s working capital are:

 The level of cash, securities, and inventory that should be kept on hand
 The credit policy (i.e., should the firm sell on credit? If so, what terms should be extended?)
 Source of short-term financing (i.e., if the firm would borrow in the short-term, how and where should it
borrow?)
 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. Courts help owners protect their property
against invasions by others, including polluters.

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 have adopted well-laid environmental-saving strategies that can be observed 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 waste might do the
other little things right that make a company well-run and profitable.

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