Chapter 1 Objectives

Question 1

1.1 Business and financial strategy

Answer 1

Strategy is concerned with the long-term direction of the business and how the objectives are achieved.
Business strategy focuses on ensuring objectives are achieved taking account of the environment, resources available and stakeholder concerns. Whereas financial strategy focuses on the financial decisions required to achieve the business strategy, focusing on investment decisions, financing decisions and risk management decisions.

Question 2

2.1 Financial strategy decisions

Answer 2

• Investment decisions: concerned with spending money, buying plant and equipment and introducing new products
• Financing decisions: concerned with raising money. Whether finance should be equity or debt or a combination. If a combination is used, they need to decide on a proportion. Concerned if dividends should be paid
• Risk management decisions are concerned with managing the risks involved in investment and financing. Interest rates and foreign exchange rates

Question 3

3.1 Stakeholders and their objectives

Answer 3

Stakeholders are individuals or groups with an interest in the performance of an organisation. Stakeholders are typically interested in wealth (shareholders), financial stability (lenders), job security (directors/employees), quality and stable supply (suppliers), taxation and job creation (government) and wealth creation and social environmental welfare (wider society).
Inevitably the objectives of different stakeholder groups will conflict.
A single objective such as maximising the wealth of shareholders is usually prioritised. The company may then satisfice (take decisions which allow for the partial satisfaction of other stakeholders).

Question 4

4.1 The agency relationship

Answer 4

Occurs when one party (the principal) employs another party (the agent) to perform a task on their behalf. The key relationship is between the shareholders and directors. Shareholders are principles and the directors are agents who employ staff, deal with customers and make strategic decisions.
Directors may act in their own best interest and if their actions are not in the best interests of the shareholders, the loss to the shareholders is known as an agency cost.

Question 5

5.1 Sustainability and ESG

Answer 5

ESG is a set of criteria used to measure and report sustainability. Therefore, ESG reporting involves disclosing operational data on areas of ESG. Businesses are encouraged to report on their environmental impact and financial risks linked to them. The performance metrics may be formed from the company’s KPIs, although ESG is difficult to quantify. It also requires management information and data analytics systems to be in place to monitor and record relevant data.