CH1 - Roles of the Financial Manager Flashcards
Main Role
Maximisation of Shareholder wealth: Long term financial planning and control
It maximises shareholder wealth via:
Investment Appraisal: and capital resource allocation: Highest return possible with best use of resources. ROI - NPV
Raising finance, minimising cost of capital
Dividend policy, future investments vs shareholder return
Stakeholder communication: Investment, financing dividends
Risk management: Interest rate risk, FX risk, companies risk appetite
Determining capital structure
Treasury function
Raise suitable finance at a good rate
Manage interest rate risk alongside investing
Centralised function: economies of scale. Pool together finance from all functions, or net off interest among
Treasury Function
Financial control: Make investment decisions in the organisation. Use of resources
AFM Focus of the Financial Manager
Have to also consider Strategic, Regulatory, Ethical and Environmental factors.
Why are we undertaking certain financial decisions?
New areas: higher risk, new finance will have a higher cost of capital. Pushes down NPV.
Strategic Impact
How does the investment fit in with the long term plans of the company? Risk appetite, stakeholder reactions, firms strengths
Any new products: increases competitive advantage. E.g. cheap = cost leadership. BE CHEAP!
Awareness of external environment: e.g. is it moving online? Political, social
Always appreciate the stakeholder impact/reaction when making a decision. Always link to share price e.g. changing risk profile could lead to alienating share holders who sell and push the price down
Regulatory Impact
Depends on the type of organisation the company is in
Ethical Impact
Grounded in good governance and highest standards, as they are agents of the shareholders
Environmental impact
Investment decisions shouldn’t compromise the needs of future generations. Economic, environmental, and social value should always be generated
Strategic Issues
Competitive advantage - what is the business currently doing, are they moving into a risky new place?
Fit with external environment - Has the economic/social environment changed? Should they go for this?
Stakeholder reactions - if not happy - will welcome new projects if positive NPV
Risk - What’s riskiere - foreign market, new operations? Balance it
Financial Issues
Positive NPVs - analyse cash flows if so - check tolerance
Impact on cost of capital - change in risk profile?
Financing - short term capital expenditure - need to know the size and the firm’s target gearing ratio to assess whether debt or equity financing required
Importance of keeping stakeholders informed
Shareholders - Support is necessary. Goals set by directors should reflect the concerns of shareholders
Government - specific targets and policies. Need to abide to stop intervention
Customers - Needed. Customers now concerned with ESG policies, communicating specific policies and goals helps this.
Suppliers - need to meet demand and understand the requiresments of the company, way in which products are produced ettc
Managers/directors/employees - Senior staff need to be kept up-to-date about policies and goals. These need to be cmmunicated to allow for effective implementation
Treasury vs Financial Control
Evaluation:
Treasury - quantify the cost of capital used in investment appraisal
Financial cotntrol - estimate project cash flows
Implementation:
Treasury - Financial objectives re gearing ratio, sources of finance, currency management: hedging, FX risk, taxation
Financial control - prepration of budgets, financial statements, internal audit, payroll
Interaction:
Treasury - setting corporate objectives
Financial control - implementation of said objectives through deployments of funds.
