Financial Management

the nature and purpose of FM

efficient acquisition and deployment of short term and long term
financial resources to ensure the objectives of enterprise are achieved

debt equity money in

financing decisions
1. sources of finance
2. Cost of capital finance
3. capital structure
4. risk company

working capital investment in NCA dividends money out

investment decisions the dividend decision
1. investment appraisal 1. business valuation
2. working cap managament 2. efficient markets
3. risk

investment decisions
long term plans of the business; purchase of NCA
working capital management; management of liquidity.

financing decisions
identification of appropriate sources; long term or short term taking into account the
requirements of the company, demands of the investors and amounts available.
dividend decisions
whether to return any of that cash invested to the owners of the business and if so how
much.
alternative would be to retain and invested back in to earn more returns; linked to finance
decision on dividend level can affect the value fo the business as a whole and ability
to raise further finance in the future.

Financial objectives
1. shareholder wealth maximisation - increasing share price and/or dividend pay out
2. profit maximisation
potential problems ; short termism, quality (risk) of earnings- higher risk may endanger
returns available to shareholder, and cash - investors will consider cash flow as well as profit.
3. EPS growth - used measure of corporate success ( profit after tax and preference share dividend/
number of shares) provides a mesaure of return to equity. Its a measure of profitability and not
wealth generation. However it doesn’t represent income of shareholder only their share of income
generated according to a formula.
4. Maximising and Satisficing -
maximising - max level of returns despite the higher exposure to risk
satificing - adequate outcome, returns are satisfactory level and avoiding risky ventures.
Corporate governance codes
the director/shareholder conflict has also been addressed by the requirements of a number of CG codes

Non executive directors

1. atleast half the members of the board excluding the chairperson should be independent NEDs
2. NEDs should get extra fees for chairing company committees but shouldn’t hold share options
3. one independent NED should be appointed as senior independent NED and act as champion for
shareholder interest
4. should be independent
5. due diligence conducted before accepting the role; knowledge skills, experience and time
6. nominations committee would examine their performance and assess if they are devoting enuf time

executive directors
1. chairperson and CEO should be separate
2. chairperson should be indpendent
3. all directors must submit themselves for re-election atleast every 3 years
4. clear disclosure of directors total emoluments and those of chairperson
5. board should set their objective the reduction of directors contract period to one year or less.

*adherence to principles of CG is voluntary they are referred to in the stock exchange listing.
measuring achievement of corporate objectives
ratio analysis compares and quantifies relationships between financial variables; profitability and return
debt and gearing, liquidity and investor.

Objective Setting in non for profit organization

Non financial objectives are more important and more complex As most key objectives are difficult to
Quantify in financial terms and multiple and conflicting objectives are more common in NFPS.

factors which influence management objectives in NFPs which distinguish them from commercial ones
- wide range of stakeholders - little or no financial input from recipients
- high level of interest from stakeholders of the service
- significant involvement of funding bodies - funding is a series of advances than lump sum
- projects are longer term - may be subject to govt influence/ macro policy

Value for Money VFM

achieving the desired level and quality of service at the most economical cost
lack of clear fin performance measures, complex mix of objectives and a growth in need for accountability
lead to VFM
system analysis is the viewing of the org as a system set up to achieve its objectives by processing inputs
into outputs
the 3 E's
economy : minimising cost of input required to achieve a level of output
efficiency : ratio of outputs to inputs, achieving high level of outputs to inputs; input driven
effectiveness : whether outputs are achieved to match the predetermined objectives
year 0 1 2 3 4 5 6 7
CFs -4000 900 900 1100 -2600 1800 1700 ###
8% 1 0.925926 0.85733882 0.793832 0.73502985 0.680583 0.630169627 0.6
PV -4000 833.3333 771.6049383 873.2155 -1911.07762 1225.05 1071.288366 ###
15% 1 0.952381 0.907029478 0.863838 0.82270247 0.783526 0.746215397 0.7
PV -4000 857.1429 816.3265306 950.2214 -2139.02643 1410.347 1268.566174 ###

8% -27.95400918
5% 513.8721129

IRR 7.85%
financial manager needs to consider
1 organisations commercial and financial objectives
2 broader economic environment
3 potential risks associated with decision and how to manage

Financial roles
management accounting
providing information for the more day to day function of control and decision making.
involves; budgeting, cost accounting, variance analysis and evaluation of alt uses of ST
resources
financial management
concerned with long term raising of finance and the allocation and control of resources
involves; targets objectives long term In nature
financial accounting
not directly involved in day to day planning and control and decision making, concerned
with providing info about the historical results of past plans and decisions
purpose is to keep the shareholders and other interested paries informed of the overall
financial position of the business.

The distinction between commercial and financial

objectives is to emphasize that not all objectives can be
expressed in financial terms and then some objectives
derived from commercial marketplace consideration

Corporate strategy concerns the decision made by

senior management about maters such as the particular
business the company is in

Business strategy concerns the decisions made by the

separate business units within the group; each unit try to
maximise its position

operational strategy concerns how different functional

areas within a SBU plan their operations to satisfy the
corporate and business strategies; day to day decisions
of all aspects of WC

Stakeholder view - Balancing the competing claims of wide range of stakeholders and taking into account
Of broad economic and social responsibilities; Professor Charles handy
While the interests of these other groups must obviously be balanced and managed only shareholders
have the relationship with organization that is one of risk and return so practically long term financial
objective of a private sector is to maximise the wealth of equity investors

Agency theory occurs in one party the principal employs another party the agent to perform a task on
their behalf. Why is the agent has been appointed they're able to act in their own selfish interest rather
than pursuing the objects of the principle
Examples of directors making corporate decisions in their own interests rather than for the benefit of the
Company include:
1. Remuneration - During the UK recession 2008 2009 the greatest media attention focused on companies
that receive government assistance but continue to reward top executives highly
2. Empire building - Executives gained prestige from successful bids and from being in charge of large
conglomerates but returns to shareholders you're disappointing
3. Creative accounting - to flatter their published accounts and artificially boost share prices even though
the accounting policies and standards are subject to opinions of the auditors
4. Off balance sheet finance - Ways of financing assets where the method of funding is not recorded on
the balance sheet example quasi subsidiaries where liabilities are moved so they don't appear on the
parents company balance sheet IFRS 5 aimed to restrict this
5. Takeover bids - Director spend considerable time defending their companies against takeover bids
fearing that they have will have to retire if it's taken over
6. I need to go to activities - The importance of good business ethics and CSR have been recognized in the
Recent years .

Management rewards schemes

Ensuring managers take decisions consistent with the objectives of shareholders these schemes should be;
Clearly define impossible to manipulate and easy to monitor, Link rewards to changes in shareholder wealth ,
Match managers time horizons to shareholders time horizons, And encourage managers to adopt
Attitudes to risk

1. Remuneration linked to minimum profit levels - Easy to set-up and monitor however there is a risk of
short termism and Managers underachieving ; Relax as soon as minimum is achieved and creative accunting
2. Remuneration linked to economic value added (EVA) - Measure of the increase in the value of shareholder
wealth in the period these are designed to closely align the interests of employee and shareholder
However calculating the bonus may be complex
3. Remuneration linked to revenue growth - Business growth and high production levels can lead to
economies of scale which would make the firm will price competitive. But revenue growth is it cheap
at the expense of profitability
4. An executive share option scheme ESOP
Encourage managers to maximize share value is they are awarded share options But such schemes are
Over a relatively long. Encourage managers to make decisions to invest in positive return projects but
Maybe penalized when share prices are falling in general

Criticisms of ESOP
- Directors tend to Sell the share options immediately to cash on their profit unless they are awarded
with most options
- If share prices fall then options go underwater and have no value to act as incentive
- If large quantities of share options issued there is a risk of excessive dilution of equity interest to existing
shareholders
- Directors may distort reported profits to protect the share prices and value of share options