Corporate Financial Goals

8 Key excerpts on "Corporate Financial Goals"

• 

  eBook - ePub

  Corporate Financial Strategy

  • Ruth Bender(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Part 1 Putting financial strategy into context DOI: 10.4324/9780203082768-1

  • 1 Corporate fi nancial strategy: setting the context
  • 2 What does the share price tell us?
  • 3 Executive summary: linking corporate and fi nancial strategies
  • 4 Linking corporate and fi nancial strategies
  • 5 Financial strategies over the life cycle
  • 6 Corporate governance and fi nancial strategy

  Passage contains an image

  1 Corporate financial strategy

  Setting the context DOI: 10.4324/9780203082768-2

  • Learning objectives
  • Introduction
  • Financial strategy and standard financial theory
  • Risk and return: a fundamental of finance
  • Financial strategy
  • Valuing investments
  • Creating shareholder value
  • Sustainable competitive advantage
  • Managing and measuring shareholder value
  • Shareholder Value Added
  • Economic profit
  • Total shareholder return
  • Some refl ections on shareholder value
  • Reasons that market value might differ from fundamental value
  • Who are the shareholders?
  • Other stakeholders
  • Agency theory
  • The importance of accounting results
  • Behavioural finance
  • Key messages
  • Suggested further reading

  Learning objectives

  After reading this chapter you should be able to:

  1. Understand what financial strategy is, and how it can add value.
  2. Explain why shareholder value is created by investments with a positive net present value.
  3. Appreciate how the relationship between perceived risk and required return governs companies and investors.
  4. Differentiate the different models of measuring shareholder value.
  5. Explain why share price is not necessarily a good proxy for company value.
  6. Outline how agency theory is relevant to corporate finance.
  7. Identify the impact of different stakeholders on financial strategy and shareholder value.

  Introduction

  The main focus of a financial strategy is on the financial aspects of strategic decisions. Inevitably, this implies a close linkage with the interests of shareholders and hence with capital markets. However, a sound financial strategy must, like the best corporate and competitive strategies, take account of all the external and internal stakeholders in the business.

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  Strategy and Structure of Japanese Enterprises

  • Toyohiro Kono(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  For participants' goals, employee welfare has a higher priority than the dividend. Earnings per share is not so important. The desirable levels for participants' goals are not explicitly stated in many cases, and probably there is no set level of aspiration. For system goals, target values are set for growth, profitability and stability, and stress is laid in a balanced attainment of multiple goals. Many large corporations use a computer simulation to forecast the future of goal values, and to compare the forecast value with the desired value.

  To establish the desired levels of goal value, the competitive approach is important because Japanese corporations are competition-oriented. To set the desired target sales amount or growth rate, return on investment, or market share, the targets values of competitors in the home country – and increasingly those in the USA and in Europe – are referred to, rather than the standards set by theoretical estimation.

  This competitive attitude with respect to sales, growth rate and share of the market, at the sacrifice of short-range profit and equity ratio, has resulted in aggressive investment in equipment for expansion and for modernization, and in tremendous efforts to improve the quality and to lower the cost of the product. This in turn has resulted in actual competitive power in the world market.

  Long-range planning and budgeting are extensively used, as tools for attaining a balanced achievement of multiple goals.

  3.4 Time Horizon of Goals

  For any organization the balancing of short-term performance and long-term performance is a problem, but a balance has to be attained. Some organizations, however, put more emphasis on short-term profit, and some put more emphasis on long-term performance. If the company invests a large amount of money in advertising and little in research and development, present sales will increase, but future sales will decline. If the company does not modernize its facilities, it may increase immediate profits but equipment will deteriorate and eventually profit and sales will decline. If the company does not put time and money into employee training, the future capability and morale of its employees will suffer. If the company does not develop new products, its future performance will be poor. The Japanese corporation is more long-term-oriented with respect to product–market strategy, to capability building and to performance.

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  eBook - ePub

  Corporate Finance and Governance in Stakeholder Society

  Beyond shareholder capitalism

  • Shinichi Hirota(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  7 Corporate finance and its objectives

  1. Existing studies on corporate financing

  1.1 The shareholder model and corporate finance

  Chapters 4 to 6 argue that if modern corporations are captured by the stakeholder model, the ideal corporate governance mechanism and the desirable form of the relevant institutions and laws are different from what the traditional view has described. In this context, this chapter and the next consider the corporate financing of modern firms from the standpoint of the stakeholder model.

  Over the last half century, numerous theoretical and empirical studies have been conducted in the field of corporate finance on topics such as firms’ investment behavior, financing, and dividend policy.1 The findings of these studies are circulated not only among academics but also among businesspersons through their education at business school. In fact, corporate finance textbooks used at business schools in various countries (e.g., Brealey, Myers, and Allen 2011 and Ross, Westerfield, and Jaffe 2008) largely reflect the research findings on corporate finance.

  The accumulated studies on corporate finance are, for the most part, based on the shareholder model, as is the case in other fields in economics. These studies assume that firms decide the amount and type of investment, the financing sources, and the amount of dividends and share repurchases in a way to maximize shareholder value. In some cases, they assume that the goal of a firm is to maximize corporate value. In such cases, however, they define corporate value as equity value or suppose that maximization of corporate value leads to maximization of shareholder value. In other words, the existing studies on corporate finance rarely view corporate value in a broad sense – as value that includes the interests and satisfaction of non-shareholder stakeholders (e.g., employees, customers, and vendors).2

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  eBook - ePub

  The Chief Financial Officer and Corporate Performance

  Finance, Governance and Risk

  • El?bieta Bukalska, Anna Wawryszuk-Misztal, Tomasz Sosnowski(Authors)
  • 2024(Publication Date)
  • Routledge

    (Publisher)

  The company acquires capital in the financial market by issuing equity or debt instruments. The investors by buying financial instruments invest in the company and expect the rate of return. Then the collected capital is invested by the company in investment projects. The company buys machinery and inventory, runs operating activity, and sells products in the goods and service market. By running a business, the company creates a portfolio of business projects. And the company expects a rate of return on their investment. The difference between sales revenues and costs shows the profit of the company. Part of the profit is distributed among the investors (among owners and creditors according to their expectations) and the rest of the profit is reserved for the next investment projects in the company (reinvested, reserve capital).

  1.1.3 The goals of financial management

  The goal of financial management should be subordinated to the main goal of the company. There are different wordings of the company goal: to survive, to avoid financial distress, to beat the competition, to maximize sales or market share, to minimize costs, and to maintain steady earnings growth. Some people think that the appropriate goal can be stated as the maximization of net profit. Others think that the appropriate goal can be stated as the maximization of the current value per share of the existing stock/maximization of the market value of the owners’ equity (Ross et al., 1993 ; Copeland et al., 2005 ).

  On the one hand, net profit turns out to be the financial item that is easily misreported. The ENRON case proves that there are a lot of possibilities to show a higher value of net profit than it really is (accounting manipulations: recording the revenue before dispatching the goods). The company might take some actions that will increase net profit in the short-term but will have negative long-term results (the company might increase the net profit by decreasing R&D expenses) (Latham and Braun, 2010 ).

  On the other hand, market value is the result of the investors’ behaviour (demand and supply side). Investors’ behaviour depends on their psychological and cognitive mental process (some fallacies and biases, moods and emotions). Investors might follow the behaviours of other investors (herd behaviour) (Mobarek et al., 2014 ). Additionally, investors might be misled by inappropriate managers’ behaviour. The managers might take only these actions that will gain positive investors’ response (increase in market share prices) no matter whether it is good for the company's long-term running (e.g. paying generous dividends) (Kothari et al., 2016

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  eBook - ePub

  The Fundamental Principles of Finance

  • Robert Irons(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  10  Finance Within the Firm

  This chapter is intended as an overview of how finance is used both in the economy and within the corporate structure. We will discuss the role finance plays in different industries as well as within a company. We will review the different forms of organization a business can take, along with the benefits and shortcomings of each form. Finally, we will discuss the goals financial managers should pursue in the decisions they make.

  The Role of Finance

  Within a business, the role of finance is to determine how money is to be raised, spent and invested. Funds raised from different sources have different costs and different associated risks. The chief financial officer decides whether to issue new bonds, for what maturity and paying what interest rate, or to issue equity, preferred or common, and what dividend to pay the shareholders. The ability to raise money quickly and at a reasonable cost directly impacts other decisions the firm will make, from what markets to enter to how many people to hire. The CFO will help to decide what products to make and how to make them, based on the costs associated with the production processes and the cash flows realized from the products. The CFO determines how much cash to make available for operations and where to invest any leftover cash. Credit policy, inventory valuation and dividend policy all fall under the responsibility of the head of the finance department.

  Within a corporation, money is followed carefully through the system, and it is managed both for the short term and the long term. In the short term, the firm must decide how much cash to keep on hand, how much inventory to keep on the shelves, how much credit to extend and to whom and whether to pay the bills quickly to get a discount or pay them later at full price. In the long term, decisions include which production assets to purchase, whether to use manual or automated processes, whether to build a production facility or rent one, whether to pay a trucking company to ship their goods or to purchase their own fleet of trucks, or any number of other decisions that will determine the nature of the firm’s cash flows for years to come.

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  eBook - ePub

  Business for Communicators

  The Essential Guide to Success in Corporate and Public Affairs

  • Sandra Duhé(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  Denning, 2017 ). Investments in research and development, along with innovation, tend to be cast aside in favor of other opportunities with a seemingly quicker payoff in boosting share price. A short-term business mindset gets costlier over the long term when the outcomes of neglected areas of investment (e.g., employees, communities, technology) become apparent. The late, famed General Electric CEO Jack Welsh described shareholder value as an outcome, not a goal, of a business that should be run for the benefit of stakeholders beyond shareholders alone.

  Although the U.S. is undoubtedly a financially driven economy, the business shift away from shareholder primacy and toward a broader stakeholder approach to value creation is gaining traction. That’s good news for corporate communicators whose focus expands across multiple stakeholder groups. The Business Roundtable, a professional association for American CEOs, in 2019 issued their “redefinition” of a corporation’s purpose, specifically moving away from shareholder primacy toward a focus on value creation for multiple stakeholders including customers, employees, suppliers, communities, and shareholders (“Business Roundtable Redefines,” 2019 ). Communication is central to this evolving way of doing business and underscores the importance of communicators having business acumen.

  Three Functions of Corporate Finance

  Capital Investments and Budgeting

  Companies have numerous opportunities to invest and grow a business, but not all are optimal. Corporate finance uses analytical techniques to determine where best to invest the firm’s money in long-term assets such as manufacturing plants, machinery, and real estate (Kenton, 2019a ; “What is Corporate Finance,” 2020 ). Capital can mean cash provided by an individual or group (e.g., shareholder or bank) in exchange for promise of a return on the profits generated by investing that cash (e.g., dividend or interest payments). Capital also refers to capital investments made in physical assets (e.g., property, plant, and equipment, or PPE3 ). Any use of the term capital will refer to investments made for long-term returns to the business, that is, projects and equipment expected to generate profits for more than one year.4

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  eBook - ePub

  Strategic Management of Built Facilities

  • Craig Langston, Rima Lauge-Kristensen(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Part 1

  Corporate Goals

  Business today is a competitive and customer-focused activity that must operate in an environment that is subject to continual change. Being successful means that the business has a clear vision and works towards identified goals while simultaneously improving quality, reducing costs and minimizing risk. Often this results in a concentration on core business tasks, with support tasks aligned to reflect overall corporate goals and strategy. More importantly, it involves empowering staff and enabling them to be productive through proper workplace design.

  Facility management is about ensuring that infrastructure supports core business tasks. Infrastructure is not limited to buildings and floor space, but includes issues such as technology, communication strategy, workplace design and ergonomics, auxiliary services, security and environmental impact. In essence, facilities are the setting within which a planned activity can occur. Therefore the nature of facilities differs according to business function, industry, location, time and potential future directions. While facilities are important and in many cases represent significant capital value, they are secondary compared to human resources, despite being closely related.

  The link between facility management and human resource management is worker productivity. Constructing a setting that can sustain planned activities is necessary, yet developing ways in which business processes can be more effectively performed is a higher order goal. It involves an understanding of human needs and practices from a range of stakeholder perspectives including investor, employer, employee and customer.

  To be effective, all parts of the organization must be co-ordinated so that a common purpose is maintained. This is accomplished through a clearly articulated set of corporate goals and a team approach, particularly among upper management. Corporate goals usually are about core business tasks. For example, a goal is not to construct a new building but rather to introduce a new product or service to the market, which by implication requires supporting infrastructure. The role of the facility manager is to match corporate goals with the physical settings to support them, while the role of the human resource manager is to match corporate goals with the necessary skilled people for their achievement. Obviously the facility manager and the human resource manager must work closely together.

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  eBook - ePub

  Naked Finance

  Business Finance Pure and Simple

  • David Meckin(Author)
  • 2011(Publication Date)
  • Nicholas Brealey Publishing

    (Publisher)

  Part OneSETTING FINANCIAL OBJECTIVES

  To manage the finances of a businessyou need to know where you are going Passage contains an image

  2 IS IT ALL ABOUT PROFIT?

  Every day managers are bombarded by numbers: sales, margins, salaries, stock levels, profit, cash, and share prices – the list is endless. The situation is not helped by the fact that the mantra from on high regularly changes from ‘increase sales’ to ‘cut costs,’ ‘reduce stock levels,’ ‘improve cash flow,’ ‘cut staff,’ or ‘increase profit.’ If only people would make up their minds! How can you be expected to make sound managerial decisions when you’re not given clear guidance about what the business is trying to achieve?

  You will be relieved to hear that the primary financial objective of most businesses rarely changes. What does change is how they try to achieve that objective. Once you understand what the goal is, the various methods available for attaining that goal will make a lot more sense. In this chapter we going to look at the role of profit in business and also introduce another concept regularly talked about, cash flow.

  What does a business need to survive?

  Business is all about trade, and trade can be defined as ‘the activities of buying and selling.’ Since buying activities involve expenditure while selling activities involve revenue, it follows that any entity concerned with the management of revenue and expenditure can be regarded as a business.

  Whatever your business, how can you ensure it will survive? Unfortunately, many businesses close down within their first year of operation. This is not necessarily because their products are of poor quality or their customer service is lacking. The most common reason is poor financial management. There are two prerequisites for survival: sound management of the business itself and sound management of its finances. If either of these is lacking, the business will have a very short life.

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