Download 1) Corporate financial plans are often used as a basis

1) Corporate financial plans are often used as a basis for judging subsequent
performance. What can be learned from such comparisons? What problems might arise
and how might you cope with such problems?
The ability to meet or exceed the targets embodied in a financial plan is
obviously a reassuring indicator of management talent and motivation.
Moreover, the financial plan focuses attention on the specific targets that top
management deems most important. There are, however, several dangers.
a.Financial plans are usually accounting-based, and thus are subject to the
Biases inherent in book profitability measures.
b. Managers may sacrifice the firm’s best long-term interests in order to
meet the plan’s short- or medium-run targets.
c. Manager A may make all the right decisions, but fail to meet the plan
because of events beyond his control. Manager B may make the wrong
decisions, but be rescued by good luck. In other words, it may be difficult
to separate performance and ability from results.
Corporations use numerous arrangements in an attempt to ensure that
managers’ actions are consistent with stockholders’ objectives. Agency costs
can be mitigated by ‘carrots,’ linking the manager’s compensation to the
success of the firm, or by ‘sticks,’ creating an environment in which poorly
performing managers can be removed.
2) Managers sometimes state a target growth rate for sales or earnings per share. Do you
think that either makes sense as a corporate goal? If not, why do you think that manager
focus on them?
Neither the growth rate of earnings nor the growth rate of sales translates generally
into value maximizing policies for the firm; in this sense a focus on these variables is
not an appropriate corporate goal. Nevertheless, targets for these growth rates
might be convenient ways to signal the belief that, in a particular situation,
increasing a variable like sales could be value enhancing. Moreover, focusing on a
particular variable like sales growth might provide a guideline as to what aspect of
corporate performance requires the most attention. These growth rates might be
viewed as easily communicated proxies for factors that are more fundamental
concerns of management.