Corporate Financial Goals

6 Key excerpts on "Corporate Financial Goals"

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  eBook - PDF

  Visionary Strategic Leadership

  • David L. Rainey(Author)
  • 2008(Publication Date)
  • Information Age Publishing

    (Publisher)

  GE invested heavily into developing its capabilities during the 1990s. While such investments helped GE grow its revenues, the underlying development goal was to make GE’s businesses more sophisticated and tech- nological advanced, thus more competitive and sustainable in the future. Corporate Financial Goals often take the form of the growth of revenues, net in- come, the return on investment, and the value of the corporation itself. The growth of revenues is usually stated in terms of percent increase on an annual basis. Net income goals are often stipulated in both absolute and relative basis. They typically involve the profits that are generated annually and the rate of increases in profitability. They may also involve profits and cash flow over a number of years in the future on a cumulative basis. They may be couched in ways to recognize the variability that may exist due to fluctuations in the business environment. For instance, the profit goals might be aver- age profits over a five-year period. Financial rewards are important traditional goals. Financial return takes many forms including return on equity (ROE) reflecting the owners’ invested capital, return on assets (ROA) reflecting the total financial invest- ment, and return on investments (ROI) in new programs reflecting the performance of recent investments. Corporate Financial Goals also include increase in the share price of the corporation’s stocks and in the market capitalization. These goals pro- vide strategic direction and a sense of the expectations of the owners of capital and the directors of the corporation. While the appropriateness of such goals is obvious, they should involve more than just making money and maximizing profits. They are 74  Visionary Strategic Leadership the incentives and rewards for taking risks and achieving success. Without financial rewards, it would be difficult to sustain success.

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  Hospitality Management Accounting

  • Martin G. Jagels(Author)
  • 2006(Publication Date)
  • Wiley

    (Publisher)

  2. To decide on the sources of needed capital and to obtain the funds required by the firm to meet its goals. 3. To allocate these funds effectively to the various assets of the company, again with the company’s goals in mind. Only with clearly stated goals can an organization effectively manage its finances. Without them, a business operates without a plan. In a small owner- operated enterprise, a goal may be expressed in simple terms, such as that the owner wishes to make enough net income in the first 11 months of the year to take a vacation in the twelfth month. In a large or chain operation, goals would be established in a much more formal way by the board of directors. Goals are frequently expressed in monetary terms. Some of these financially measurable goals are discussed next. PROFIT MAXIMIZATION Profit maximization, or making the most amount of money in the shortest pos- sible time, is one of the commonly considered objectives or goals of a com- pany. It is argued that the total amount of profit or net income is not a realistic measure, since one can always sell more shares and invest the proceeds in mar- ketable securities, thus increasing total net income. Because of this, maximiza- tion of earnings per share may be a better way to measure net income. In either case, however, the time element is important because of the time value of money. Most people would agree that $100,000 net income in the first year and noth- ing in each of the following 9 years is preferable to $10,000 per year for each O B J E C T I V E S O F F I N A N C I A L M A N A G E M E N T 555 of 10 years. The reason is that the entire $100,000 could be invested in the first year and continues to accumulate interest until the end of the tenth year, thus maximizing net income. However, one of the problems with profit maximization as a goal is that it may ignore the possible risks of an investment.

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  Sustainable Financial Investments

  Maximizing Corporate Profits and Long-Term Economic Value Creation

  • Brian Bolton(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  To many people, CSR and business sustainabil- ity are very different concepts and combining these terms or their related activities is inappropriate. There may be different manage- rial or strategic implications related to CSR and business sustainabil- ity. However, we will not worry about this distinction, as we will try to keep the discussion about value creation as generic as possible. That is, the economic and finance issues explored throughout this book can be applied to any type of investment—whether it is a CSR investment, a sustainability-related investment, an oil pipeline, or an assembly line. The purpose of the firm “The goal of financial management is to maximize the current value per share of the existing stock.” (Ross, Westerfield, and Jaffe, Corporate Finance) 1 “Fortunately there is a natural financial objective: Maximize the cur- rent market value of shareholders’ investment in the firm.” (Brealey, Myers, and Allen, Principles of Corporate Finance) 2 Standard corporate finance textbooks generally agree that the goal of financial management is to maximize the value of the stock price. This is nice because it provides one simple and objective The Purpose of the Firm 5 goal. We think financial markets are good at valuing firms because the markets are good at incorporating lots of information very quickly. This information can be anything, from a company’s new products to sales forecasts to personnel issues to expected litiga- tion costs. The stock price goes up with good news and down with bad news. Economic theory and modeling can be used to clarify this process. There is one critical assumption underlying this pro- cess: that the stock price and value creation reflect all priorities and preferences of all the firm’s stakeholders. While this perspec- tive is not necessarily wrong, it is a highly simplified approach to measuring firm value.

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  Corporate Governance and Directors' Liabilities

  Legal, Economic and Sociological Analyses on Corporate Social Responsibility

  • Klaus J. Hopt, Gunther Teubner, Klaus J. Hopt, Gunther Teubner(Authors)
  • 2012(Publication Date)
  • De Gruyter

    (Publisher)

  However, the general finding that business managers focus most attention on profitability or more generally on economic goals is not essentially disturbed if controlled for the effects of variables such as type of business, relative size of organization, internal resources and skills, technology applied, managerial philosophy. — A comparative study (FRG & GB) of corporate goals (Budde et al., 1982), as they are perceived by managers (the sample was made up of 44 companies concentrated in five main industries, 186 managers responding), confirms the ongoing results. The managers were asked to indicate on a seven-point scale how important each goal was in the long run. The fol-lowing rank order was established (lower values indicate greater importance; data refer to the FRG only): Maximizing rate of return on capital, 2.28, maximizing growth in total profits 2.38, maximizing company's prestige 2.56, maximizing growth in sales 2.96, maximizing growth in dividends paid to shareholders 3.46, maximizing the level of rewards and benefits for employees 3.50. The goal maximizing the provision of a service to the com- Corporate Social Responsibility: Interests and Goals 107 munity at large reaches 3.77 (9th place) (ibid., 12). Without going into detail (about research problems and differences between the two countries), one may agree with the generalized statement that, in the main, an examination of the corporate goals espoused by senior British and West German exe-cutives suggests that in each country the satisfaction of capitalist economic objectives remains paramount (ibid., 14). Furthermore, the propositions that 1. the profit-goal in its wider sense is considered as a means towards the fulfillment of other (sub-)goals and 2. there are zones of positive and negative trade-offs between various goals, are underlined by additional findings (ibid., 15—16). The relative strength given to the prestige motive seems to hint at European characteristics.

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  Creating Value

  • Shiv Sahai Mathur, Shiv Mathur, Alfred Kenyon(Authors)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  10

  For example, if a successful competitive offering has a net present value to the company of n, but can be sold for n + x, then the correct corporate strategy is to enhance owner value by x, i.e. to divest the offering so as to realize n + x cash now. The test of whether an offering should be retained is not whether it is ‘profitable’ or not, but whether it will from now on add further financial value to the company.

  The tool that ensures the creation of financial value in cluster management is the ‘better-off test’ described in Chapter 14 .

  Agency Conflict

  Managers11 need a clear view of their goal, and the overriding goal is to add financial value. In a simple model, managers are the servants of the owners; owners want the financial value of their company to be maximized, and managers therefore serve their job prospects best by maximizing that value. Interests and goals are in perfect harmony. The goal is financial, and its test is success in the financial markets.

  This harmonious model runs into the difficulty called ‘agency conflict’. The expression means that the self-interest of company managers can and does conflict with the interests of shareholders. Agency conflict may occur in all types of financial systems.12 However, the particular form which has been observed is peculiar to those modern stockmarket systems in which hostile takeover bids are common, as in the US and UK and perhaps a dozen other countries.13 In other words, where there is a market in corporate control. In such systems, relations between investors and managers are relatively impersonal and distant.

  Conflict of this kind has notably been suggested by Jensen and Meckling,14 and characterizes much financial theory. Reservations about its importance have however been expressed in strategy theory.15

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  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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