Objectives of a Business

7/28/2019 Objectives of a Business

1/17

The Business Environment.

At the end of this lecture you should be able to:

understand the objectives of a business entity.

understand the role of financial management in

a business entity achieving its objectives.

appreciate how funds flow between the various

parts of the wider economy.


2/17

Objectives of a Business.

The objectives of the company;-

The only specific purpose which corporations ought

to serve is to secure the highest long-term return ontheir capital (F. HAYEK-1960).

There is one and only one social responsibility ofbusiness to use its resources and to engage inactivities designed to increase its profits as long as it

stays within the rules of the game (M. FRIEDMAN-1970).


3/17


4/17

Objectives of a Business.What constraints;-

LABOUR - fair wages & salaries, pensions, career development,

etc.

PROVIDERS OF CAPITAL - fair interest rates paid on time.

PROVIDERS OF GOODS & SERVICES fair price paid on time.

CUSTOMERS - good products at a fair price.

SOCIETY - improved quality of living.

GOVERNMENT - taxation, employment, foreign exchange, etc.

DIRECTORS - fair remuneration, status, security, pensions, etc.


5/17

Objectives of a Business.

The theory of business finance is based

upon the assumption that the companyshould seek to maximize the wealth of the

shareholders. The shareholders own the

company and there is therefore some logic

in the idea that it should be run in theirinterests, (subject to satisfying all the

other STAKEHOLDERS).


6/17

Shareholders.

SHAREHOLDERS - are looking for a return on

their investment in two ways;-

1) A DIVIDEND paid out of the profits of the

companys activities.

2) A HIGH SHARE VALUATION a high or rising

share price gives the shareholder the opportunity

for a potential CAPITAL GAINS.


7/17

Financial Management.

SUMMARY- In broad terms, Financial Management entailsconstructing a conceptual framework within which onecan establish a meaningful inter-relationship of three mainvariables;-

1) The Financial Goals of the Company(PROFIT/DIVIDENDS).

2) The Valuation of the Company and the extent to whichthis valuation is influenced by company decisions (CAPITAL

GAINS).

3) The means of measuring the performance of thecompany- when its goals have been identified and themethod of valuation chosen, the companys performancemust be monitored and assessed (CONTROL).


8/17


At the end of this lecture you should:

understand the objectives of a business entity.

understand the role of financial management

within a business achieving its objectives.

appreciate the environment that business

entities operate in.


9/17


THE FLOW OF FUNDS;- The economy can be divided, for

convenience, into four sectors;-

1) PERSONAL SECTOR (HOUSEHOLDS).

2) BUSINESS SECTOR (INDUSTRY & COMMERCE).

3) PUBLIC SECTOR (GOVERNMENT).

4) OVERSEAS SECTOR.


10/17

Personal Sector.1) PERSONAL SECTOR - What the personal sector decide to

spend their income on has major implications for all

companies. However, what the public do not spend their

income on also has important implications for companies;-

SAVING = CURRENT INCOME CURRENT EXPENDITURE.

Savings represent the funds that the personal sector hasavailable to invest either in physical assets or in financial

assets such as pension funds, equity shares, bank accounts,

etc. If the personal sector is spending its income and not

saving, it means that there are less funds flowing into the

other sectors.


11/17

The Business Sector.2) BUSINESS SECTOR - Corporateinvestment is primarily financed out of

internally generated funds, (retainedprofits and depreciation), secondly out ofborrowing, (loans or debenturesdebt),and finally by the issue of new shares,(equity).


12/17

The Business Sector.

Companies do not pay out all their profits individends. Although any profit the company earnsbelongs to the shareholders it is not in anybodysinterest to pay this out each year. Companiesretain some of the profit within the company for

two main reasons;-


13/17

The Business Sector.a) Although a companys profit can and does varyfrom year to year it is not in the interest of the

shareholder to have a wildly fluctuating dividendeach year, rather a constant/slightly risingdividend each year enables the shareholder tominimise their own tax liability and henceincreases their own personal wealth bysmoothing out the dividends paid.

b) The companys assets wear out over time andtherefore will need to be replaced with new,therefore some retained profit will be needed toreplace worn out assets.


14/17

The Public Sector.3) PUBLIC SECTOR The Government has a major influence

upon the economy and hence the companies operating

within that environment.

If the government runs short of funds, it will need to borrow

(Public Sector Borrowing Requirement) from the financial

intermediates. It does this by issuing Government Loan

Stock (gilt-edged securities or gilts), the only risk-free

investment available, this will inevitably push up interestrates leading to companies reducing their investments from

borrowed funds.


15/17

The Public Sector.

Through taxation the government will have a major effect;-

a) by increasing the income-tax rate, the government can

take funds from the personal sector and channel this intoapproved business investment

b) by increasing the corporation-tax rate, the government

can take more funds off companies to channel them into its

own spending plans

c) by increasing the Capital Allowances, (the tax-allowable

depreciation rate), the government allows companies to

retain more profit, hence more funds available for re-

investment


16/17

The Public Sector.

d) by increasing the Capital Gains Tax. Normally anindividual or a company will be charged capital

gains tax on any gain received as a result ofdisposing of an asset, (all forms of property, landand buildings, plant and machinery, stocks andshares, etc.). This tax can however, be rolled-over if the asset being disposed of is replaced by

a new similar asset, (up to 2years before or up to5 years after the disposal of the old asset,).

e) etc.


17/17

The Overseas Sector.4) OVERSEAS SECTOR - When an import ispurchased, the funds flow out of the economy tothe overseas economy, (an inflow of funds when

an export is completed). Similarly, when anoverseas investment is made, funds flow out ofthe economy, however if that investment isprofitable, then there will be a future inflow offunds in the form of future dividends, (vice versawith inward investments).

Objectives of a Business

Documents

Transcript of Objectives of a Business