Chapter II.
Introduction to Financial Management
2. Relationship of Financial Objectives to Organizational Strategy
and Other Organizational Objective
INTRODUCTION
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 established its
overall objectives.
Objective setting is thus, an important phase in the business enterprise since
upon correct objectives setting will the entire structure of the strategies, policies
and plans of a company rest.
WHAT IS FINANCIAL OBJECTIVES?
An objective set by a company in which the target state is measured in monetary
terms, such as a certain amount of profits, or a certain percentage increase in profits
over a period of time.
Common Financial Objectives
1. Revenue Growth Objectives
Increasing revenue is the most basic and fundamental financial objective of any
business. Revenue growth comes from an emphasis on sales and marketing activities,
and is solely concerned with increasing top-line earnings – earnings before expenses.
Companies often set revenue goals in terms of percentage increases rather than
aiming for specific dollar amounts. An entrepreneur may set an objective of
increasing revenue by 20 percent each year for the first five years of a new
company's operations, for example.
2. Profit Margins and Bottom-Line Earnings
Profit objectives are a bit more sophisticated than revenue growth goals. Any money
left over from sales revenue after all expenses have been paid is considered profit.
Profit, or bottom-line earnings, can be used in a number of ways, including investing
it back into the business for expansion and distributing it among employees in a
profit-sharing arrangement.
Profit goals are concerned first with revenue, then with costs. Keeping costs low by
finding and building relationships with reliable suppliers, designing operations with
an eye toward lean efficiency and taking advantage of economies of scale, to name a
few methods, can leave you with more money after paying all of your bills.
3. Financial Sustainability in Times of Turmoil
At certain times, companies or brands may be primarily concerned with basic
economic survival. Retrenching is a marketing technique – based on a financial
objective – that attempts to keep a brand alive and keep current revenue and profit
levels from falling any further during the “decline” stage of the product/brand life
cycle.
Companies may be concerned with financial sustainability during periods of
economic turmoil, as well. Common financial objectives for survival include
collecting on all outstanding debts on time and in full, de-leveraging by paying off
debt and keeping income levels consistent.
4. Return on Investment
Return on Investment is a financial ratio applied to capital expenditures. ROI can be
applied to two basic scenarios. First, ROI is concerned with the return generated by
investments in real property and productive equipment. Business owners want to
make sure that the buildings, machinery and other equipment they buy generates
sufficient revenue and profit to justify the purchase cost.
Secondly, ROI applies to investments in stocks, bonds and other investment
instruments. The same principle applies to these investments, but there is generally
no physical, productive asset used to generate a return. Instead, ROI for investment
products is calculated by comparing the dividends, interest and capital gains realized
from investments by the cost of the investment and the opportunity cost of forgoing
alternative investments.
Strategic Financial Management
What Is Strategic Financial Management?
Strategic financial management means not only managing a company's finances but
managing them with the intention to succeed—that is, to attain the company's goals
and objectives and maximize shareholder value over time. However, before a
company can manage itself strategically, it first needs to define its objectives
precisely, identify and quantify its available and potential resources, and devise a
specific plan to use its finances and other capital resources toward achieving its
goals.
Strategic financial management is about creating profit for the business and ensuring
an acceptable return on investment (ROI). Financial management is accomplished
through business financial plans, setting up financial controls, and financial decision
making.
Strategic Planning
Strategic Planning can be understood as a systematic long-range planning activity,
that an organization uses to fix priorities, strengthen operations, ascertain objectives
and focus on the resources required and are to be allocated in order to pursue the
strategy and attain the objectives.
It is a part of the strategic management process, which ensures that every aspect of
the organization is working towards the achievement of the organization’s goals, i.e.
in the right and intended direction.
Strategic Planning ascertains what an organization is, to whom it serves, where is it
going and what are the paths, which are to be followed to follow its vision. It
includes strategic decision making, strategic intent, strategic management model
and strategy formulation.
Characteristics of Strategic Planning
Strategic Planning is an analytical process which formulates strategic and
operational plans for the organization. The implementation of strategic plans is
possible through projects, whereas various units or divisions of the firm
implement operational plans.
It performs SWOT Analysis, i.e. during the planning process, the firm’s
strengths, weaknesses, opportunities and threats are taken into consideration.
It is a forward-looking activity wherein the future opportunities and threats
are ascertained while considering its profitability, market share, product and
competition.
It presupposes that a firm should always be ready to adapt itself according
to the dynamic business environment. For this purpose alternative strategies are
developed for different circumstances, i.e. from best to worst, for the future
It can be done for the entire organization or to a specific business unit.
It is helpful in selecting the best strategy, among the various strategies taking into
account the firm’s interest, personal values and corporate social Characteristics of
Strategic Planning
