Management of Business Handout – Chapter 2 (Business Objectives)

The nature, role and importance of objectives.

The ‘hierarchy of objectives’ shows visually the balance and dependencies between the different stages in the setting of aims and objectives.

Corporate aims are the very long term goals which a business hopes to achieve. The core of the business’s activity is expressed in its corporate
aims and plans. All corporate aims have certain common characteristics. They are all embracing, that is they are designed to provide guidance to
the whole organization and not just a part of it. Also, they are statement of goals, not strategies, as they give no indication of how these aims
might be reached. A business without a long term corporate plan is likely to drift from event to event without a clear sense of purpose.
Benefits:
 They become the starting point for the entire set of objectives on which effective management is based.
 They help develop a sense of purpose and direction for the whole organization if they are clearly and unambiguously communicated to
the workforce.
 They allow an assessment to be made, at a later date, of how successful the business has been in attaining its goals.
 They provide the framework within which the strategies or plans of the business can be drawn up.

It has become increasingly common for businesses to express the corporate aim in one short, sharp vision like statement called the Mission
Statement. This is a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups.
They do not tell managers what decisions to take or how to manage a business.
For example, Google’s mission statement is “
Mission statements are often communicated in several ways; in published accounts, internal company newsletters and magazines and
advertising slogans and posters.
Benefits:
 Quickly inform groups outside the business what the central aim and vision is
 Can prove motivating to employees, especially where an organization is looked upon
 Can help to guide and direct employee behavior at work when they include moral values
 They help to establish in the eyes of other groups what the business is about
Drawbacks:
 Too vague and general which ends up saying too little
 Based on public relations to make stakeholders feel good about the organization
 Visually impossible to analyze or disagree with
 Too wholly and general, so two different companies can have similar statements
Corporate objectives are designed to turn all aims and mission statements into goals or targets which are quite specific to each business and
which can themselves, be broken down into strategic departmental targets.
Common corporate objectives:
 Maximizing profits: Profit maximization is simply producing at that level of output where the greatest positive difference between total
revenue and total costs is achieved. Profits are essential for rewarding investors in a business and for financing further growth and also
to persuade business owners to take risks.
Limitations:
- The focus on high short term profits may encourage competitors to enter the market and jeopardize the long term survival of the
business.
- Many businesses seek to maximize sales in order to secure the greatest market share possible, rather than maximizing profits.
- Since small businesses tends to be more concerned with leisure time, then the issues of retaining control may have more
significance than making higher profits.
- Profit maximization may well be the preferred objective of the owners and shareholders but other stakeholders will give priority to
other issue thereby causing lower profit levels to cater for those other needs.

 Growth: Larger firms will be less likely to be taken over and should be able to benefit from economies of scale while a business that does
not attempt to grow will cease to be competitive and eventually, will lose its appeal to new investors.
Limitations:
- Expansion which is too rapid can lead to cash flow problems
- Sales growth might be achieved at the expense of lower profit margins
- Larger businesses can experience diseconomies of scale
- Growth in new business areas away from the firm’s core activities can result in loss of focus and direction for the whole organization.

 Increase Market Share: It is possible for an expanding business to suffer market share reductions, if the market is growing at a faster rate
than the business itself. Increasing market share indicates that the marketing mix of the business is proving to be more successful than
that of its competitors.
Benefits of having the highest market share:
- Retailers will be keen to stock and promote the best-selling brand
- Effective promotional campaigns are often based on ‘buy our product with confidence’ – it is the brand leader.

 Social, ethical and environmental considerations: firms must adopt a wider perspective when setting their objectives, not just those of
profits and expansion. Influential pressure groups are forcing businesses to reconsider their approach to decision making. Also, legal
changes have forced businesses to refrain from certain practices. Managers clearly wish to avoid conflicts with the law or bad publicity.
 Consumers and other stakeholders will react positively to businesses that act in ‘green’ or socially responsible ways, for e.g. businesses
that refuse to stock goods that have been tested on animals or foods.

 Maximizing sales revenue & shareholder value: this could benefit managers and staff when salaries and bonuses are dependent on sales
revenue levels and also increase share prices and returns to shareholders.

The main issues relating to corporate objectives:

- They must be based on the corporate aim
- They should be achievable and measurable if they are to motivate employees
- They need to be communicated to employees and investors in the business
- They should indicate the timescale for their achievement

Factors that determine the corporate objectives of a business.

 Corporate culture: culture is defined as the code of behavior and attitudes that influence the decision making style of the managers
and other employees. Culture is the way of doing things that is shared by all those in the organization. The culture of a business will
be determined by several factors:
- The personality and management style of the owner and leader
- The structure of the organization. For e.g. a tightly centralized and rigid structure will tend to make the business more resistant to
change.
- The culture of the organization. This helps to determine objectives. Task culture assumes greater significance than the people doing
it. This approach is Theory X. While, there are those businesses that are people oriented (People Culture). There is great concern for
the people doing the job and the extent of their involvement in it. This attitude will bring good productivity due to high team spirit
and motivation.
The business culture will determine:
- The objectives of the business
- The way in which the objectives are expressed
- The involvement of the workforce in setting them
- How the actions required to achieve objectives are determined and put into effect.

 The size and legal form of the business: small businesses will be concerned with satisficing while larger businesses might be more
concerned with rapid business growth in order to increase the status and power of the managers.

 Public or private sector businesses: State owned businesses will have their major objectives as providing services; hence, having a
financial target will be inappropriate. But private enterprises operate to make profits.
  The number of years the business has been operating: newly formed businesses are likely to be driven by the desire to survive at all
costs but once well established, they may pursue other objectives e.g. growth.

Operational Objectives – short term objectives

Once corporate objectives (long term) have been established they need to be broken down into specific targets for separate divisions,
departments and individuals. These divisional objectives ensure coordination between all divisions, consistency with corporate objectives and
that adequate resources are provided.

Establishing strategy.

Strategies are the long term plans that are needed to reach those targets. A strategy is therefore a ‘means to an end’. Any business strategy will
be influenced by 4 main factors:
 Strengths of the business: if a business has proven capabilities in certain areas it is often wisest to apply these strengths when devising
future strategies. Expansion of the business may be best achieved if some low performing areas of the business are sold off
concentrating on its current successes to achieve growth. For e.g. Pepsi purchased Quaker Oats and eventually sold it off but kept the
soft drink division which sells highly.
 Resources available: all business resources are finite. Scarce resources will force firms to choose which projects to proceed with and
which to drop.
 Competitive environment: competitors’ actions are a major constraint or limit on business strategy. Innovations by competitors may be
difficult to copy or to better. Major new promotional campaigns could prove to be very effective.
 Objectives: the objectives of a business will influence strategy. Increasing market share as an objective may not be achieved if the efforts
of the business are being directed towards entering completely new markets with new products.
 Corporate and operational strategies: once an overall strategy has been agreed upon by the Board of Directors, operational and
departmental plans have to be established. These must be well coordinated to ensure that departments do not introduce conflicting
policies.

Stakeholders and their objectives.

A stakeholder is an individual or group with a direct interest in the performance of a business.

Stakeholder Main objectives
Directors To direct the strategy and major decision making of the
business
To retain control
To increase their own power and status from business
growth
Shareholders Their reward must be atleast equal to that which would be To receive dividends from after-tax profits
available elsewhere. To share in the success/profitability of the business
Their reward comes from the annual dividend and increased through an appreciating share price
prices for the shares they own.
They are protected by law because their position is thought to be
weak compared to that of the business itself.
Rights:
- To receive annual accounts
- To attend the AGM to vote on matters such as
election of directors.
- To become a director if elected at the AGM
- To sell their shares on the open market
- Limited liability in the event of the business being
wound up.
Workforce If the employees’ interests are not being met there will be several To receive a fair wage
damages to the business which includes: To ensure good working conditions
 Industrial action; poor productivity; high absenteeism and To secure their jobs through the survival and expansion of
labour turnover; legal intervention and negative customer the business
reaction to poorly paid workers.
Meeting employees objectives will also depend on
 Profitability of the business; culture of the organization;
availability of labour supply; union power within the firm;
management attitudes and leadership style
Customers To obtain good value for their money from the
goods/services purchased
To receive high levels of customer service
To receive after sales service and supply of spares from a
business which survives into the future.
Suppliers To continue to sell profitably to the business
To be paid promptly and fully for goods supplied
Banks/Lenders They are particularly concerned with the liquidity of the business. To be paid back in full when payments are due
To receive interest on the loan when due
Community To benefit from the employment the business creates
To be free from environmental disadvantages the firm
might generate
Government They use persuasion and support which would not always favour To receive tax revenue from profitable firms
businesses. Therefore, business activity may have to be adjusted To direct the operations of the business for the benefit of
to ensure these new laws are complied with. the community
To control business operations and performance to ensure
it remains within national and EU laws
To assist the business in accordance with local and national
policy
Competitors To compete by all lawful means
To differentiate its products from those of other businesses
To compare and contrast performance with other
businesses.

Management by Objectives (MBO)

This is a system which is designed to motivate and coordinate a workforce by dividing the organization’s overall aim into specific targets for each
division, department and individual. If this process is undertaken after discussion and agreement with personnel at each level of the organization
then it can be a very effective way of delegating authority and motivating staff.
Benefits:
 Staff motivation and job enrichment is encouraged when targets and objectives are agreed amongst manager and staff at all levels.
 Each manager and subordinate will know exactly what they have to do
 Everyone will be working at the same overall target
 Managers are able to monitor everyone’s performance and measure success or failure.

Drawbacks:
 Dividing these objectives can be very time consuming
 Objectives can become outdated very quickly
 Setting targets does not guarantee success as some managers might believe.
Conflict of objectives
It is inevitable that with so many different stakeholders interested in the affairs and performance of a business there will be times when their
objectives come into conflict. For e.g. workers’ leaders ask for a wage rise, buy managers state that this cannot be afforded as they need to
invest extra capital back into the business. Business managers have to resolve or reduce these conflicts if they aim to satisfy as many
stakeholders as possible. Some businesses do not aim to do this but most have strict codes of practices such as all debts to be paid within 30
days. In trying to resolve the conflict, a business can:
 Establish closer cooperation with suppliers
 Achieve good publicity from local activities and environmentally friendly policies
 Have good industrial relations with workforce
 Be well regarded with the government

Business ethics and social responsibility

When a firm does accept their legal and moral obligations to stakeholders other than investors it is said to be accepting ‘corporate
responsibility’. Corporate responsibility has led to businesses adopting an ‘ethical code’ to influence the way in which decisions are made. Ethics
are the moral guidelines that determine decision making. An ethical code is a formal business document that lays down the rules that managers
and employees should adopt when faced with a decision or a dilemma.

Arguments for adopting business strategies which are socially responsible:

 Businesses that reduce pollution by using ‘green’ equipment can have real marketing and promotional advantages as consumers will
support them, for e.g. the Body Shop that do not harm animals in testing.
 Bad publicity and stiff court fines are avoided when they comply with rules for pollution and waste disposal.
 Applications from outside are increased when businesses are environmentally friendly.
 There are long term financial benefits too.
Arguments against adopting business strategies which are socially responsible:
 Marketing advantage: business will keep costs as low as possible even though the environment is damaged as a result
 Profits will be reduced if the latest, least polluting methods are always purchased which restricts expansion and more productivity
 Legal protection of the environment is weak in some countries
 In developing countries it is argued that economic development is more important than protecting the environment.

Environmental and ethical issues

Pressure groups are organizations created by people with a common interest or aim who put pressure on businesses and governments to
change policies so that the objective is reached. For e.g. Greenpeace and Worldwide Fund for Nature.
Pressure groups want changes to be made in 3 important areas:
 Governments to change their policies and to pass laws supporting the aims of the group
  Businesses to change policies
 Consumers to change their purchasing habits so that businesses that adopt appropriate policies see an increase in sales, but those that
continue to pollute or use unsuitable work practices see sales fall.

Pressure groups try to achieve these goals in a number of ways:

 Media coverage: the more bad publicity the group can create for the company concerned the greater the chance of it succeeding in
changing corporate policy.
 Influencing consumer behavior: if the pressure group is so successful that consumers stop buying a certain company’s products for long
enough then the commercial policy becomes much stronger.
 Lobbying the government: this means putting the arguments of the pressure group to the government members and ministers because
they have the power to change the law.

Environmental Audits
An audit simply means an independent check. It is most commonly known in connection with the accounts of a company which have to be
verified as a true and fair account by an external auditor. An environmental audit would check the pollution levels, wastage levels and recycling
rates of the business and compare them with previous years and targets.
Chapter 16 – Budgetary Accounting

A budget is a quantitative, detailed and financial plan for a future time period.

If no plans are made, an organization drifts without real direction and purpose. Managers will not be able to allocate the scarce resources of the
business effectively without a plan to work towards. The process of converting plans into budgets is known as budgeting and the process of
checking on whether budgets are being met is known as budgetary control.

Advantages of setting budgets.

 Planning. This translates the objectives of the firm into intentions for achievement. It gives a sense of purpose to the workforce.
 Effective allocation of resources. There will be priorities to discuss, since what will be done is always likely to be greater than resources
will permit.
 Setting targets to be achieved. Research shows that most people work better if they have a realisable target at which to aim.
 Coordination. People will have to work effectively together if targets set are to be achieved.
 Monitoring. There is a need to check that plans and objectives are still within reach.
 Modifying. If there is evidence to suggest that objectives cannot be reached, then either the plan or the way of working towards it must
be changed.

Data gathering and projections.

If senior management arrive at budgeted figures with no prior research or gathering of relevant data and then expect these targets to be
reached, they will almost certainly find that:
 They are set at an unrealistic level
 The staff working with these unrealistic budgets become demotivated because they were not consulted
These problems can largely be overcome by effective data gathering to base future projections on.

Key features of budgeting.

Budgets are financial plans that organizations aim to fulfill.

A forecast is a prediction of what could occur in the future given certain conditions.

Budgets may be established for any part of an organization as long as the outcome of its operation is quantifiable. These may be sales budget,
cash budgets, etc.
*Coordination between departments when establishing budgets is essential. This should avoid departments making conflicting plans.
*Decisions regarding budgets should be made with the subordinate managers who will be involved in putting them into effect.
*The budget will be used to review the performance of a department and the managers of that department will be appraised on their
effectiveness in reaching targets.

Process of preparing budgets.

1. Organizational objectives for the coming year are established based on previous performance, external changes that are likely to affect
the organization and forecasts based on research.
2. The key or limiting factor that is most likely to influence the growth or success of the organization must be identified. Care and accuracy
are essential at this stage.
3. The sales budget is prepared.
4. The subsidiary budgets are prepared, which will now be based on the plans contained in the sales budget.
5. The budgets are coordinated to ensure consistency. This may be undertaken by a budgetary committee with special responsibility for
ensuring that budgets do not conflict with each other.
6. A master budget is prepared that contains the main details of all other budgets and concludes with a budgeted profit and loss account
and balance sheet.
7. The master budget is then presented to the Board. Once approved, the budgets will become the operational plans of each department
and cost centre within the organization.

Incremental or Zero Budgeting

Incremental Budgeting uses last year’s budget as a basis and an adjustment is made for the coming year. It does not allow for unforeseen events.
Zero Budgeting requires all departments and budget holders to justify their whole budget each year. This is time consuming but it does provide
incentive for managers to defend the work of their own section.

Variance Analysis
At the end of the budgeted period the actual performance of the organization needs to be compared with the original targets and reasons for
differences must be investigated. This process is known as Variance Analysis. A variance is the difference between budgeted and actual figures.
This is essential for a number of reasons:
- It measures differences from the planned performance of each department
- It assists in analysing the causes of deviations from budget
- The reasons for the deviations from the original planned levels can be used to change future budgets in order to make them more
accurate.

Favourable Variable is whereby it has an effect of increasing profits while Unfavourable Variance is where it has an effect of reducing profits.
Cash Flow Management
In order to manage the cash inflow and outflow, managers will need access to:
- The size and likely timing of cash flows into the business
- The size and likely timing of payments out of the business
- Whether there are sources of finance to cover periods when cash shortages could arise

A cash flow forecast is an attempt by management to plan ahead, to prevent future liquidity problems. It contains estimates of cash receipts and
payments over the coming months. The preparation of a cash flow forecast will show the bank manager that the owners of the new business are
aware of the need to manage cash flow carefully.

If the cash flow forecast predicts negative cash flows and negative cash balances, managers have certain options they can consider to tackle this
problem:
- Reducing or delaying expenditure. For e.g. reducing advertising spending. These decisions would have a beneficial impact on short term
cash flow but negative effects on long term.
- Obtain cheaper supplies of materials and components. This could, however, reduce product quality.
- Rent or lease equipment rather than buying outright. This reduces short term cash outflows but will lead to regular, if smaller, payments
in the future.
- Delay the payment of bills. This extends the credit period but suppliers may be unwilling to accept later payment especially from new
businesses with an unknown credit history.
- Get cash in more quickly from the sale of goods. This can be done in a number of ways:
 Insisting on cash at the time of sale but this can lead to loss of business
 Reducing the debtor period which can also lead to loss of customers
 Selling the debts to a specialist institution such as debt factor
 Using a bank overdraft. This has high interest rates and banks can recall overdrafts at a very short notice
 Obtaining a short term loan which has lower interest rate than overdraft
 An established business could sell some of its assets to a leasing company and lease them back.
 Method of improving cash flow
Delay payments to suppliers
Reduce or delay capital spending
Rent or lease equipment rather
than outright purchase
Reduce debtor period and/ or
insist on cash payment from
customers
Use debt factor to release cash
from debts
Obtain overdraft or short term
loan
Cash statements shows inflows and outflows of cash during an accounting period and explain the difference between the cash balance at the
beginning and end of that period.
A funds flow statement is a method of showing where a business gets it funds from and how those funds have been spent. It shows the extent to
which profits have contributed to the total supply of funds. It also indicates whether the firm has enough funds to meet its needs or whether its
liquidity position is worsening.
Advantages
No interest charges.
Does not require reductions in capital spending or
measures that might reduce customer demand.
No immediate negative effects
No impact on supplier or customer relations
Reduce capital costs
Maintenance is responsibility of the owning or leasing
company
Avoids funds tied up in debtors
Avoids the risk of bad debts arising
Debts are turned into cash
Risk of bad debts is now taken by the factoring
company
Flexible forms of finance that can be used at times
when firm may be short of cash
Avoids potential damage to supplier/customer
relations from adopting some of the other methods
Disadvantages
Suppliers may refuse further deliveries if cash
payments is not received
May worsen relationship with supplier leading
to less effective working partnership
Early payment discounts could be lost
Old equipment may become less reliable and
efficient
Business may lose competitiveness in the future
Leasing or rental charges will become a long
term cash outflow of the business
The asset will never be owned and will not
increase balance sheet value
Customers may take their orders to firms that
do offer credit
A sizeable discount will have to be paid to the
debt factor
Customers may prefer to deal with the business
directly rather than a debt factor
High interest rates will add to future cash
outflows
Overdrafts can be called back by banks at very
short notice and this could lead to business
failure if no other funds are available