江西财经大学会计学院 Topic A Financial management function

江西财经大学会计学院 PART A-1 Financial management and financial objectives

江西财经大学会计学院 Topic list

江西财经大学会计学院 Study guide

江西财经大学会计学院 Study guide

江西财经大学会计学院 Exam guide The material in this chapter is examinable as an entire discussion question or as a question involving calculations such as ratios and discussion. When doing a ratio analysis question, you must make sure you apply your answer to the organisation in the question. The organisation will not necessarily be a publicly quoted company with shareholders. The pilot paper has 8 marks for calculation and evaluation of interest coverage, financial gearing and EPS following a change in financing.

江西财经大学会计学院 The nature and purpose of financial management Fast forward Financial management decisions cover investment decisions, financing decisions, dividend decisions and risk management.

江西财经大学会计学院 Financial management What is financial management Financial planning Financial control Financial management decisions Management accounting, financial accounting and financial management (page 6)

江西财经大学会计学院 What is financial management Financial management can be defined as the management of the finances of an organization in order to achieve the financial objectives of the organization. The usual assumption in financial management for the private sector is that the objective of the company is to maximize shareholders' wealth.

江西财经大学会计学院 Financial planning in the short term,cash for inventory,recivable, payables in the medium and long term,non-current assets

江西财经大学会计学院 Financial control The control function of the financial manager becomes relevant for funding which has been raised. Are the various activities of the organization meeting its objectives? Are assets being used efficiently? To answer these questions, the financial manager may compare data on actual performance with forecast performance. Forecast data will have been prepared in the light of past performance (historical data) modified to reflect expected future changes. Future changes may include the effects of economic development, for example an economic recovery leading to a forecast upturn in revenues.

江西财经大学会计学院 Financial management decisions Text book ： P5-6

江西财经大学会计学院 Question 'The financial manager should identify surplus assets and dispose of them'. Why?

江西财经大学会计学院 Financial objectives and the relationship with corporate strategy Strategy Corporate objectives Financial objectives Non-financial objectives

江西财经大学会计学院 Strategy ---strategy is the course of action to achive an objective -----long term and short term -----depends on stated objective or targets ----Key term Strategic financial management can be defined as 'the identification of the possible strategies capable of maximizing an organization's net present value, the allocation of scarce capital resources among the competing opportunities and the implementation and monitoring of the chosen strategy so as to achieve stated objectives'.

江西财经大学会计学院 Case study Text book : P7-8

江西财经大学会计学院 Management accounting, financial accounting and financial management Text book : P6-7

江西财经大学会计学院 Note

江西财经大学会计学院 Corporate objectives Fast forward Corporate objectives are relevant for the organisation as a whole, relating to key factors for business success. key factors for business sucess -----return on investment -----market share -----growth

江西财经大学会计学院 ----cash flow ----customer satisfaction ----the quality of the firm's products -----industrial relations -----added value

江西财经大学会计学院 Financial objectives Fast forward Financial targets may include targets for: earnings; earnings per share; dividend per share; gearing level; profit retention; operating profitability. The usual assumption in financial management for the private sector is that the primary financial objective of the company is to maximise shareholders' wealth.

江西财经大学会计学院 Shareholder wealth maximization Balance sheet valuation Break-up basis Market values

江西财经大学会计学院 Shareholder wealth maximization the wealth of the shareholders comes from ---dividend received ----market value of the share shareholder's returen ----dividend received -----capital gains from increase in the market value of his shares (formulae page 9)

江西财经大学会计学院 profit maximisation the firm behaves in such a way as to maximise profit but there are problems -----manager no sharehold the interest -----accounting profits are not the economic profit -----maximising profits must be achived by increasing risk

江西财经大学会计学院 ----profits does not take account of volume of investment -----short term performance

江西财经大学会计学院 Question Can you give three examples of how accounting profits might be manipulated?

江西财经大学会计学院 Earnings per share growth Key term Earnings per share is calculated by dividing the net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares.

江西财经大学会计学院 Question

江西财经大学会计学院 there has the problems: ----is a figure based on past data ----easily manipulated by changes in accounting policies and by mergers or acqusition

江西财经大学会计学院 Other financial targets gearing profit retentions operating profitability

江西财经大学会计学院 Example: Financial targets

江西财经大学会计学院 Solution

江西财经大学会计学院 Question Suggest policies on dividends, retained earnings and gearing for Lion Grange, using the data above.

江西财经大学会计学院 Non-financial objectives The welfare of employees The welfare of management The provision of a service The fulfilment of responsibilities towards customers The fulfilment of responsibilities towards suppliers The welfare of society as a whole

江西财经大学会计学院 Stakeholders Fast forward Stakeholders are individuals or groups who are affected by the activities of the firm. They can be classified as internal (employees and managers), connected (shareholders, customers and suppliers) and external (local communities, pressure groups, government).

江西财经大学会计学院 Stakeholders Key term There is a variety of different groups or individuals whose interests are directly affected by the activities of a firm. These groups or individuals are referred to as stakeholders in the firms.

江西财经大学会计学院 Stakeholders Text book : P14

江西财经大学会计学院 Objectives of stakeholder groups Ordinary (equity) shareholders Trade payables Long-term payables (creditors) Employees Government Management

江西财经大学会计学院 Stakeholder groups, strategy and objectives Text book : P15

江西财经大学会计学院 Shareholders and management Key term Agency relationship: a description of the relationship between management and shareholders expressing the idea that managers act as agents for the shareholder, using delegated powers to run the company in the shareholders' best interests.

江西财经大学会计学院 Shareholders, managers and the company's long-term creditors risky investment decisions interest payments on time extra dividends

江西财经大学会计学院 Shareholders, managers and government Taxation Encouraging new investments Encouraging a wider spread of share ownership Legislation Economic policy

江西财经大学会计学院 Measuring achievement of objectives Measuring financial performance The broad categories of ratios Ratio pyramids Profitability Debt and gearing ratios Liquidity ratios: cash and working capital Shareholders' investment ratios

江西财经大学会计学院 Measuring achievement of objectives Fast forward Performance measurement is a part of the system of financial control of an enterprise as well as being important to investors.

江西财经大学会计学院 Measuring financial performance Exam focus point Examiners have said, more than once, that knowledge of how to calculate and interpret key ratios is a weak point for many candidates. Make sure that it is one of your strong points. In reviewing ratio analysis below, we are in part revising material included in previous units.

江西财经大学会计学院 The broad categories of ratios Profitability and return Debt and gearing Liquidity Shareholders' investment ratios ('stock market ratios').

江西财经大学会计学院 Ratio pyramids Text book : P17

江西财经大学会计学院 Profitability (a) Whether the company has made a profit or a loss on its ordinary activities (b) By how much this year's profit or loss is bigger or smaller than last year's profit or loss

江西财经大学会计学院 Profitability and return: the return on capital employed

江西财经大学会计学院 Evaluating the ROCE

江西财经大学会计学院 Secondary ratios

江西财经大学会计学院 Secondary ratios Exam focus point Remember that capital employed is not just shareholders' funds; this was highlighted as a frequent mistake in previous exams.

江西财经大学会计学院 Return on equity

江西财经大学会计学院 Example: Profit margins

江西财经大学会计学院 Debt and gearing ratios (a) refuse further borrowing (b) very little profit

江西财经大学会计学院 Shareholders' investment ratios Fast forward Indicators such as dividend yield, EPS, P/E ratio and dividend cover can be used to assess investor returns.

江西财经大学会计学院 Shareholders' investment ratios Key term Cum dividend or cum div means the purchaser of shares is entitled to receive the next dividend payment. Ex dividend or ex div means that the purchaser of shares is not entitled to receive the next dividend payment.

江西财经大学会计学院 The dividend yield

江西财经大学会计学院 Example: Dividend yield

江西财经大学会计学院 Earnings per share (EPS)

江西财经大学会计学院 The price earnings ratio

江西财经大学会计学院 The price earnings ratio

江西财经大学会计学院 Example: Price earnings ratio A company has recently declared a dividend of 12c per share. The share price is $3.72 cum div and earnings for the most recent year were 30c per share. Calculate the P/E ratio.

江西财经大学会计学院 Changes in EPS: the P/E ratio and the share price

江西财经大学会计学院 Question

江西财经大学会计学院 Encouraging the achievement of stakeholder objectives Managerial reward schemes Regulatory requirements

江西财经大学会计学院 Managerial reward schemes Fast forward It is argued that management will only make optimal decisions if they are monitored and appropriate incentives are given.

江西财经大学会计学院 Managerial reward schemes Key term Goal congruence is accordance between the objectives of agents acting within an organization and the objectives of the organization as a whole.

江西财经大学会计学院 Example

江西财经大学会计学院 Beneficial consequences of linking reward schemes and performance Text book : P23-24

江西财经大学会计学院 Regulatory requirements Fast forward The achievement of stakeholder objectives can be enforced using regulatory requirements such as corporate governance codes of best practice and stock exchange listing regulations.

江西财经大学会计学院 Corporate governance Fast forward Good corporate governance involves risk management and internal control, accountability to stakeholders and other shareholders and conducting business in an ethical and effective way.

江西财经大学会计学院 Corporate governance Key term Corporate governance : Corporate governance is the system by which organizations are directed and controlled.

江西财经大学会计学院 Corporate governance Text book : P24-25

江西财经大学会计学院 Stock Exchange listing regulations Fast forward A stock exchange sets rules and regulations to ensure that the stock market operates fairly and efficiently for all parties involved.

江西财经大学会计学院 Not-for-profit organizations Fast forward Not-for-profit and public sector organisations have their own objectives, generally concerned with efficient use of resources in the light of specified targets.

江西财经大学会计学院 Not-for-profit organizations Voluntary and not-for-profit sectors Objectives Value for money Performance measures

江西财经大学会计学院 Voluntary and not-for-profit sectors Case study Oxfam operates more shops than any commercial organization in Britain, and these operate at a profit. The Royal Society for the Protection of Birds operates a mail order trading company which provides a 25% return on capital, operating very profitably and effectively.

江西财经大学会计学院 Voluntary and not-for-profit sectors Key term Bois proposes that a not-for-profit organization be defined as:'... an organization whose attainment of its prime goal is not assessed by economic measures. However, in pursuit of that goal it may undertake profit-making activities.'

江西财经大学会计学院 Objectives Text book : P26

江西财经大学会计学院 Value for money Key term Value for money can be defined as getting the best possible combination of services from the least resources, which means maximizing the benefits for the lowest possible cost.

江西财经大学会计学院 Value for money Key terms Effectiveness is the extent to which declared objectives/goals are met. Efficiency is the relationship between inputs and outputs. Economy is attaining the appropriate quantity and quality of inputs at lowest cost to achieve a certain level of outputs.

江西财经大学会计学院 Example: Economy, efficiency, effectiveness

江西财经大学会计学院 Performance measures Text book : P27-28

江西财经大学会计学院 Example: Performance measures

江西财经大学会计学院 Example: Inputs and outputs

江西财经大学会计学院 Chapter Roundup Text book : P29

江西财经大学会计学院 Quick Quiz 1

江西财经大学会计学院 Quick Quiz 2

江西财经大学会计学院 Answers to Quick Quiz

江西财经大学会计学院 Revision P3-5 Financial management Function 1-5