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Study notes

Internal and External Influences on Financial Objectives

  • Levels: AS, A Level, IB, BTEC Level 3
  • Exam boards: AQA, Edexcel, OCR, IB

A variety of internal and external factors will influence the setting and achievement of financial objectives.

INTERNAL INFLUENCES ON FINANCIAL OBJECTIVES

Business ownership

The nature of business ownership has a significant impact on financial objectives. A venture capital investor would have quite a different approach to a long-standing family ownership.

Size and status of the business

E.g. start-ups and smaller businesses tend to focus on survival, breakeven and cash flow objectives. Quoted multinational businesses are much more focused on growing shareholder value

Other functional objectives

Almost every other functional objective in a business has a financial dimension – which often brings the finance department into conflict with other functions.

REMINDER ABOUT THE MAIN TYPES OF FINANCIAL OBJECTIVES

The six main categories of financial objective are:

EXTERNAL INFLUENCES ON FINANCIAL OBJECTIVES

Economic conditions

As demonstrated by the Credit Crunch. The economic downturn forced many businesses to reappraise their financial objectives in favour of cost minimisation and maximising cash inflows and balances.

Significant changes in interest rates and exchange rates also have the potential to threaten the achievement of financial targets like ROCE.

Competitors

Competitive environment directly affects the achievability of financial objectives. E.g. cost minimisation may become essential if a competitor is able to grow market share because it is more efficient

Social and political change

Often an indirect impact. E.g. legislation on environmental emissions or waste disposal may force an business to increase investment in some areas, and cut costs in others

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