What are some potential conflicts between short-term and long-term financial objectives?
One of the most significant conflicts between short-term and long-term financial objectives arises due to differences in expected results. In certain situations, short-term results brought about by the short-term financial objectives may make it difficult to achieve some long-term financial objectives.
For instance, a short-term financial objective would be to increase profits through outsourcing or renting certain functions, like warehousing; however, such an objective would conflict with a long-term objective of shareholder wealth maximization because the warehousing facility will not be owned as an asset by the company and remains a perpetual cost. Thus, while the company pursues profitability, it may lose an opportunity to increase company wealth in the future.
Environmental volatility increases with time and may present an opportunity for conflict between short-term and long-term financial objectives. The ability to predict risk diminishes with time, and the situation presents a challenge in how the business chooses to finance its operations. For instance, a loan taken to finance short-term objectives may appear lucrative at that particular moment, but the same may present challenges in the long-term when payments are due. The challenges may arise due to the unpredictable nature of the value of money and legislative policies, among other environmental factors.
The question of short versus long term results is very important in business, and in fact, emphasis on quarterly earnings may well have contributed to the current economic downturn. Much of the long term profitability of business depends on investment in human and physical capital and also in research and development. Many of these things cost money and take a long time to pay off.
A simple example might be the choice of how to finance a physical plant. You could lease a property, buy an existing property that might have older and more inefficient technology, or have one custom built to suit your business. Leasing (or other forms of outsourcing) are least expensive over the short term, but often most expensive over the long term because you don't build equity in the property.
For a drug company, investing in research that can result in new drugs is very expensive -- and it might take years to get useful results. Thus it is a strategy bad in the short term but can make the company billions in the long term. Producing copycat generics is a low risk profitable short term strategy, but in the long term a company following it will have very low profit margins.
Thus an objective to have a good quarterly report can undermine long term profitability and growth.