A1. The role and responsibility of senior financial executive/advisor

Question 1

Financial management

Answer 1

Financial management is getting and using financial resources well to meet objectives.

Question 2

Profit maximisation as main financial objective.

Answer 2

Profit maximisation is often assumed, incorrectly, to be the main objective of a business. Reasons why profit is not a sufficient objective:
• Investors care about the future
• Investors care about the dividend
• Investors care about financing plans
• Investors care about risk management

Question 3

Maximisation of shareholder wealth

Answer 3

For a profit-making company, a better objective is the maximisation of shareholder wealth; this can be measured as total shareholder return (dividend yield + capital gain)
Total shareholder return=
dividend yield (dividend per share/share price)+
capital gain (capital gain/share price)
Many companies have non-financial objectives that will also be important in assisting a company to achieve its strategic goals.

Question 4

Financial strategy

Answer 4

A financial strategy should organise an organisation’s resources to maximise returns to shareholders by focusing on future cash flows, financing and risk.

Question 5

Maximisation of shareholder wealth key decisions

Answer 5

Maximisation of shareholder wealth key decisions:
• Investment decisions
• Financing decisions 
• Risk management decisions
• Dividend decisions

Question 6

Maximisation of shareholder wealth key decisions:

Investment decisions

Answer 6

Investment decisions (in projects or by making acquisitions) are often seen as the key mechanism for creating shareholder wealth, but they will need to be analysed to ensure that they are likely to be beneficial to the investor. Investments can help a firm maintain strong future cash flows by the achievement of key corporate objectives e.g. market share.

Question 7

Maximisation of shareholder wealth key decisions:

Financing decisions

Answer 7

Financing decisions mainly focus on how much debt a firm is planning to use and whether using debt finance can help to reduce a business’s weighted average cost of capital.

Question 8

The level of gearing that is appropriate for a business depends on a number of practical issues:

Answer 8

The level of gearing that is appropriate for a business depends on a number of practical issues:
o Life cycle - A new, growing business will find it difficult to forecast cash flows with any certainty so high levels of gearing are unwise.
o Operating gearing- If fixed costs are a high proportion of total costs then cash flows will be volatile; so high gearing is not sensible.
o Stability of revenue- If operating in a highly dynamic business environment then cash flows will be volatile; so high gearing is not sensible.
o Security- If unable to offer security; then debt will be difficult and expensive to obtain.

Question 9

Maximisation of shareholder wealth key decisions:

Risk management decisions

Answer 9

Risk management decisions mainly involve management of exchange rate and interest rate risk and project management issues. The volatility of an organization’s cashflows are a powerful influence on its approach to risk management. The more volatile cash flows are, the more important risk management becomes.

Question 10

Maximisation of shareholder wealth key decisions:

Dividend decisions

Answer 10

Dividend decisions relate to how returns should be given to shareholders.

Question 11

Key Objectives of Financial Management.

Answer 11

Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested.

Question 12

3 key elements to the process of financial management

Answer 12

• Financial Planning.
• Financial Control.
• Financial Decision-making.

Question 13

3 key elements to the process of financial management:

Financial Planning

Answer 13

Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

Question 14

3 key elements to the process of financial management:

Financial Control.

Answer 14

Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:
o Are assets being used efficiently?
o Are the businesses assets secure?
o Do management act in the best interest of shareholders and in accordance with business rules?

Question 15

3 key elements to the process of financial management:

Financial Decision-making.

Answer 15

The key aspects of financial decision-making relate to investment, financing and dividends:
o Investments must be financed in some way – however there are always financing alternatives that can be considered. For example, it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers
o A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further

Question 16

The main roles and responsibilities of the financial manager

Answer 16

The main roles and responsibilities of the financial manager are varied. They can include:
• Investment selection and capital resource allocation
• Raising finance and minimising the cost of capital
• Distribution and retentions
• Communication with stakeholders
• Financial planning and control
• Risk management
• Efficient and effective use of resources.

Question 17

The main roles and responsibilities of the financial manager:
Investment selection and capital resource allocation.

Answer 17

Profit maximising may not be the only goal for a company, its stakeholders may want other things. Therefore, other considerations are as follows:
• Ethical considerations when deciding on what to invest in?
• What method of investment appraisal should be used? NPV? IRR?
• What our stakeholders will think of the investment’s effects on: ROCE or EPS

Question 18

The main roles and responsibilities of the financial manager:
Raising finance and minimising the cost of capital.

Answer 18

All investments needs financing. Where should we get this financing from? The following issues thus need to be considered:
• Are the current gearing levels minimising the cost of capital for the company?
• What gearing level is required?
• What sources of finance are available?
• Tax implications
• The risk appetite of investors and management
• Restrictions such as debt covenants
• Implications for key ratios

Question 19

The main roles and responsibilities of the financial manager:
Distribution and retention policy.

Answer 19

Retained earnings is a great source of finance, so should we give dividends away? It depends on:
• Will our investments (funded by retained earnings) increase the share price and thus shareholder wealth?
• Will paying high dividends mean we need alternative finance for capital expenditure or working capital requirements?
• Will paying low dividends fail to give shareholders their required income levels
• What are the investor preferences for cash dividends now or capital gains in future from enhanced share value?

Question 20

The main roles and responsibilities of the financial manager:
Communication with stakeholders.

Answer 20

We need to keep stakeholders informed.
• Shareholders will need information about dividends, gearing levels, risk
• Suppliers and customers will need information about credit policies, pricing policies.
• Internal stakeholders. Mission statements and current goals and strategies is important for employees at all levels

Question 21

The main roles and responsibilities of the financial manager:
Financial planning and control.

Answer 21

The senior financial executive will need to develop policies on:
• Planning processes
• Business plans
• Budgets
• Evaluating performance

Question 22

The main roles and responsibilities of the financial manager:
The management of risk.

Answer 22

Risk management is key and so the following needs understanding:
• Risk appetite
• How are risks identified, Analysed, Planned for and Monitored?

Question 23

The main roles and responsibilities of the financial manager:
Use of resources.

Answer 23

It will be important to develop a framework to ensure all resources (inventory, labour and non­current assets as well as cash) are used to provide value for money. Spending must be: economic, efficient, effective and transparent.