Flashcards in 1) Financial Management FUnction Deck (53)
1. What is financial management concerned with?
Management account and financial accounting are both concerned with resource usage to meet targets- however MA deals in short time scales and FM is concerned with the longer term
Financial management is concerned with the long-term raising of finance and the allocation and control of resources; it involves targets, or objectives, that are generally long-term by nature, whilst management accounting usually operates within a 12-month time horizon.
2. What do you need to think of when making a financing decision?
• Sources of Finance
• Cost of Capital
• Capital Structure
3. What do you need to think of when making a investment decision?
Working capital management
What is investment appraisal
Investment appraisal considers the long-term plans of the business and identifies the right projects to adopt to ensure financial objectives are met. The projects undertaken will nearly always involve the purchase of non-current assets at the start of the process.
What is working capital management
Working capital management is concerned with the management of liquidity – ensuring debts are collected, inventory levels are kept at the minimum level compatible with efficient production, cash balances are invested appropriately and payables are paid on a timely basis
4. What do you need to think of when making a dividend decision?
The decision on the level of dividends to be paid can affect the value of the business as a whole as well the ability of the business to raise further finance in the future.
• business valuation
• efficient markets
Describe the layout of corporate strategy, corporate and financial opjectives
Mission> Broad based goal > Detailed objectives/ targets which are broken into Commercial, Finance and strategy objectives. Each of these them have corporate, business and operational targets
5. What is the difference between strategy and financial objectives?
• objectives/targets define what the organization is trying to achieve. Strategy considers how to go about it. Strategy is developed in response to the need to achieve objectives
• Almost all strategies developed by the business will have financial implications and the financial manager has a key role to play in helping business strategies succeed.
5. What is the difference between commercial and financial objectives?
The distinction between 'commercial' and 'financial' objectives is to emphasise that not all objectives can be expressed in financial terms and that some objectives derive from commercial marketplace considerations.
10. What is a operational strategy
• Operational strategy concerns how the different functional areas within a strategic business unit plan their operations to satisfy the corporate and business strategies being followed.
• In this syllabus, we are most interested in the decisions facing the finance function. These day-to-day decisions include all aspects of working capital management.
12. What are the types of financial objectives for a business other than
hareholder wealth maximisation is a fundamental principle of financial management
• Shareholder wealth maximisation
• Profit maximisation
• Market share
• Social responsibilities
What are the risks of adopting profit maximisation objective?
• Long run vs short run
• Quality risk of earnings
what is long run vs short run issue?
In any business, it is possible to boost short-term profits at the expense of long-term profits. For example, discretionary spending on training, advertising, maintenance and research and development (R&D) may be cut.
will improve reported profits in the short-term but damage the long-term prospects of the business. The stock exchange will normally see through such a tactic and share prices will fall.
what is quality (risk) of earnings issue?
A business may increase its reported profits by taking a high level of risk. However, the risk may endanger the returns available to shareholders. The stock exchange will then generally regard these earnings as being of a poor quality and the more risk-averse shareholders may sell. Once again the share price could fall.
what is cash issue?
Accounting profits are just a paper figure. Dividends are paid with cash. Investors will therefore consider cash flow as well as profit
Whats is EPS and the formula for earnings per share
it is a measure of profitability, not wealth generation
profit after tax and preference share dividends divided by the number of shares in issue
What is maximising
maximising – seeking the maximum level of returns, even though this might involve exposure to risk and much higher management workloads.
What is satisficing
finding a merely adequate outcome, holding returns at a satisfactory level, avoiding risky ventures and reducing workloads.
What are the three types of stakeholder
who are the connected stakeholders
equity investors (ordinary shareholders)
finance providers (debt holders/bankers)
who are the internal stakeholders
who are the external stakeholders
the community at large
What is the agency theory
Agency relationships occur when one party, the principal, employs another party, the agent, to perform a task on their behalf. In particular, directors (agents) act on behalf of shareholders (principals).
However, the objectives of principals and agents may not coincide so requires goal congruence
What are some examples of directors making corporate decisions in their own intereests?
Off balance sheet finance
What is empire building
The high level of corporate takeover activity in the 1980s led to many chief executives believing that building as large a group as possible was a valid aim in itself, an objective described as empire building. Executives gained prestige from successful bids and from being in charge of large conglomerates, but the returns to shareholders were often disappointing.
What is creative accounting
The directors are responsible for selecting the accounting policies to be used by their company, subject to accounting standards and the opinion of the auditors.
Examples of such techniques are:
capitalising expenses on the statement of financial position (e.g. development expenditure, advertising expenditure),
not depreciating non-current assets,
maximising the value of intangibles on the balance sheet (e.g. putting a value to brands),
recognising revenue on long-term contracts at the earliest possible time,
and other forms of off-balance sheet financing (see below).
What is off balance sheet financing
One example is the use of quasi-subsidiaries into which financial liabilities are moved so that they don't appear in the parent company's balance sheet. The introduction of FRS 5 aimed to restrict off-balance sheet finance, for example by requiring quasi-subsidiaries to be consolidated into the group accounts. The collapse of Enron in the US in late 2001 put the spotlight on the various forms of off-balance-sheet finance used, and further scrutiny and regulation is inevitable.
What is attitudes against takeover bids
Boards of directors often spend considerable amounts of time and money attempting to defend their companies against takeover bids, even when it appears that the takeover would be in the best interests of the target company’s shareholders. These directors are accused of trying to protect their own jobs, fearing that they will be retired if their company is taken over.
what are unethical activities
Examples are trading with countries ruled by dictatorships, testing products on animals, emitting pollution or carrying out espionage against competitors.