A - Financial Management Function

1. Strategy

   Annotations:

   • Course of Action to achieve an objective
   1. Corporate

      Annotations:

      • Key Term: Corporate Strategy is concerned with the overall purpose and scope of the organisation and how value will be added to the different parts (business units) of the organisation.  Johnson, Scholes and Whittington.
      1. Direction of business as a whole
   2. Business
      1. how to tackle particular Markets
   3. Operational
      1. strategy for departments of the business
2. Corporate Objectives
   1. Profitability ROI
   2. Market Share
   3. Growth
   4. Cashflow
   5. Customer Satisfaction
   6. Product Quality
   7. Industrial relations
   8. Added Value
3. Financial Objectives
   1. Profit Maximisation
      1. Limitations
         1. Can be manipulated
            1. Provisions
            2. Capitalisation
            3. Adding overhead into inventory
         2. Does not account for Risk
         3. no account for vol. of investment.
         4. Short Term
   2. Max. Shareholder Wealth
      1. Business Valuation
         1. SFP
            1. Going Concern
            2. profits ↑ YOY = profitable to investors
            3. Not a measure of Market Value
         2. Break-up Basis
            1. Only of interest when threatened with liquidation or selling off to raise cash
         3. Market Values
            1. Price the company's stocks & shares are traded
               1. Most Relevant
               2. Shareholder Wealth = Dividend & MV of Shares
               3. Shareholder Return = Dividend + CG growth = (P1-P0+D1)/P0
   3. EPS growth
      1. Past Data
      2. Easily manipulated by policies, mergers or acquisitions
   4. DPS
   5. Gearing
4. Non-Financial Objectives
   1. Welfare of Employees
      1. Good Wages
      2. comfortable and safe working conditions
      3. Training & Career Development
      4. Good Pensions
   2. Welfare of Management
      1. Self Interest
         1. High Salaries
         2. Cars
         3. Perks
   3. Provision of a service
      1. as with British Gas
   4. fulfilment of responsibilities to customers
      1. Honest
      2. Fair
      3. Reliable
      4. After Sales Care
   5. fulfilment of responsibilities to suppliers
      1. companies size could give it considerable power as a buyer
      2. power should not be used unscrupulously
   6. Welfare of society as a whole
      1. compliance with laws
      2. minimise pollution
      3. Green Policies
      4. Contribute to local community
   7. Growth
   8. Diversification
   9. R&D

1. FM/FA/MA
   1. Financial Management
      1. Management of Finance
   2. Financial Accounting
      1. External Information
         1. detail performance over a defined period and state of affairs at the end of that period
         2. Legal Requirement
         3. Business as a whole
         4. Monetary nature
         5. Historic
         6. Set legal format
   3. Management Accounting
      1. Internal Information
         1. Aid, plan, control actives and aid decision making
         2. no legal requirement
         3. No Strict Rules govern preparation or presentation
         4. Focus on specific areas
         5. Non-monetary measures
         6. Historical and Future planning
2. Manage finances to achieve financial objectives of the company
   1. Private Sector objective is usually to maximise shareholders wealth
   2. Financial planning
      1. funds for needs
         1. Short Term
            1. purchases of inventory
            2. Smooth Receivables, payables and Cash
            3. Ensure working capital requirements are met (Day-to-Day running)
         2. Medium/Long Term
            1. Purchase of Non-Current Assets
               1. Plant
               2. Equip
   3. Financial Control
      1. Are objectives being met? Are Assets being used efficiently?
         1. Compare data
            1. Actual v's forecast
            2. Adjust historical data to reflect expected future changes
            3. Adjust for economic development if relevant
   4. Financial Management Decisions
      1. Dividend
         1. pay dividend = less retention of Profits
      2. Investment
         1. Cost v's Benefit
      3. Financing
         1. How to raise funds
            1. Long- Term
            2. Short Term
            3. Retention of Profits = less dividends
      4. Management of Risk

1. Stakeholders

   Annotations:

   • Key Term: Individuals or groups who are affected by the activities of the firm classified as internal, connected and external
   1. Internal
      1. Staff and Pensioners
         1. highest return for work
         2. Continued employment
         3. Max Benefits
      2. Managers and Directors
         1. Max own rewards
         2. Max Shareholder Return

            Annotations:

            • Key Term: Agency Relationship = Managers act as agents for the shareholder, using delegated powers to run the company in the shareholders best interests
            1. Director can be removed by Shareholders
            2. Directors want Company's Report & A/c's, with proposed dividend for Shareholders approval at AGM
         3. Conflict
            1. if no shares, what is incentive to be efficient
            2. Profit related pay may encourage short-term profits at the expense of needed invetments
   2. connected
      1. Shareholders
         1. Maximise Wealth
         2. entrust day to day running of business to Directors and managers
      2. Debt Holders (Bond Holders)
         1. raised finance could be used for risky investment decisions
         2. Rely on management to generate cashflow to make payments on time
         3. Security
            1. exercise security if defaulted
         4. apply for Co to be Wound up
      3. Customers
      4. Bankers
         1. Interest
         2. Capital repayment
            1. Asset Secured
      5. Suppliers
         1. paid in full
         2. Paid in terms
         3. Continue Trading
      6. Competitors
   3. External
      1. Government
         1. Political Objectives
            1. Taxes
            2. Grants
            3. Health & Safety
            4. Training Initiatives
         2. Macroeconomic Policies
            1. Economic Growth
            2. High employment
            3. inflation
            4. Interest Rates
            5. FX
      2. Pressure Groups
      3. Local & national Communities
      4. Professional & Regulatory Bodies
2. Performance Management Describe & apply measuring achievement of objectives
   1. Ratio Analysis
      1. Debt and Gearing Ratios
         1. how much the company owes
         2. Debt/equity
         3. Debt/ debt+equity
      2. Profitability
         1. Profit/ Loss
         2. Profit Growth
         3. PBT
            1. eliminates variations due to tax that would not affect the underlying profitability of the company's operations
         4. PBIT
            1. Operating Profit
            2. excludes interest and tax
         5. ROCE
            1. PBIT/ CAPITAL EMPLOYED
               1. Capital Employed
                  1. Sharesholders' funds + long-term liabilities
                  2. Total Assets - current liabilties
            2. Comparitors
               1. Prior Years
               2. Industry
               3. Current Market Borrowing
                  1. NB: Roce incurs higher risk
                  2. NB: ROCE suggests profitable use of current borrowing
            3. analyse
               1. Profit Margin x asset turnover = ROCE
         6. ROE
            1. PAT / Shareholders' Equity
               1. Comparitors
                  1. Industry
                  2. High =good management of Expenses and investments or higher gearing with higher risk
            2. Earning Power
      3. Investment Ratios
         1. EPS
         2. Changes in Shareholder return
            1. Dividend
            2. Share Price
            3. Growth Expected
         3. P/E
            1. MV Share/ EPS
               1. share worth
         4. Dividend Cover
         5. Dividend Yield
            1. DPS / Ex div MV ps
      4. Du Pont System
         1. Return on Equity
            1. Return on Investment
               1. Return on Sales (Profit Margin)
                  1. Net Income
                     1. Sales
                     2. -
                     3. Total Costs
                  2. Sales
                  3. /
               2. Asset Turnover
                  1. Sales
                  2. Total Assets
                     1. Non-Current Assets
                     2. +
                     3. Current Assets
                  3. /
               3. x
            2. Total Assets / equity
            3. x
3. how to encourage achievement of Corporate Objectives and resolve the Agency Problem
   1. Regulatory
      1. Corporate Governance codes of best practice
         1. Framework
         2. Ethics
         3. Accountability
         4. Nomination committee
         5. Board
         6. Directors
         7. Audit Committee
      2. stock exchange regulations
         1. Ensures fairness and efficiency
   2. Goal Congruence
      1. managerial reward
         1. Rewarding with Shares
            1. ...making managers owners
            2. remuneration
            3. ESOPs - Executive Share Options
               1. Selected employees
               2. Option to subscribe for shares at a fixed price after a set date
         2. Performance related pay
            1. Bonus Related to profits
         3. Benefits
            1. incentive
            2. attract and keep valuable employees
            3. KPI's Clear expectations
            4. Continued improvement
         4. Problems
            1. dysfunctional behaviour
               1. Pad budgets
            2. may not motivate as reward is too distant
            3. Self- Interest at expense of team work
            4. Higher output at expense of Quality

Annotations:

• an organisation whose attainment of its prime goal is not assessed by economic measures. However in the pursuit of that goal it may undertake Profit Making Activities

1. NFP Objective
   1. VFM

      Annotations:

      • Best possible combination of services from the least resources, maximising benefits for lowest possible cost
      1. Max benefits, lowest cost
      2. Importance
      3. EEE
         1. Effectiveness

            Annotations:

            • Extent to which declared objectives/goals are met
         2. Efficiency

            Annotations:

            • Relationship between input and outputs
         3. Economy

            Annotations:

            • attaining the appropriate quantity and quality of inputs at lowest cost to achieve a certain level of output
   2. Performance Measures
      1. Outputs can seldom be measured alone
      2. Multiple Objectives
      3. Inputs
      4. subjective
      5. Comparitors
         1. Like for Like
         2. Historical
         3. Unit Cost Measurement
      6. Broader
         1. proportion of total undergraduate population attending by subject
         2. Proportion of students graduating and classes of degrees obtained
         3. Amount of private sector research funds attracted
      7. Operational
         1. Unit cost per operating unit
         2. student ration; staff workload
         3. Class Size
         4. Courses offered
   3. Discuss impact of NFP Status on Financial and other Objective