Chapter 1 - Role of the finance function Flashcards
What is the primary objective of a profit seeking organisation?
Maximise owner wealth
What is the secondary objective of a profit seeking organisation?
Detailed objectives of how to achieve primary goal
What is the primary objective of a non-profit organisation?
Maximise benefit to beneficiaries
What is the secondary objective of a non-profit organisation?
- Economy - controlling costs
- Efficiency - achieve objectives at min cost
- Effectiveness - measure of achievement by reference to objectives
What are the 3 key roles the finance function plays?
- Enables value creation and preservation
- Shapes how value is created and preserved
- Narrates how value is created and preserved
How does the finance function enable value creation and preservation?
- Planning
- Forecasting
- Resource allocation
How does the finance function shape how value is created and preserved?
- Performance management
- Control
How does the finance function narrate how value is created and preserved?
Financial reporting
What are acceptable business ethics?
- Paying staff decent wages
- Good working conditions
- Open and honest
- Use of renewable resources
- Sourcing suppliers carefully
- Paying suppliers in a timely manner
How is mendelow’s power interest matrix used?
Used to decide who the dominant stakeholders are
Who are internal stakeholders?
- Employees
- Managers/directors
Who are connected stakeholders?
- Shareholders
- Customers
- Suppliers
- Finance providers
Who are external stakeholders?
- Community at large
- Environmental groups
- Government
- Trade unions
Why may employees vs managers be a conflict?
Jobs/wages vs bonus
Why may customers vs shareholders be a conflict?
Product/service quality vs profit/dividends
Why may general public vs shareholders be a conflict?
Effect on environment vs profits/dividends
Why may managers vs shareholders be a conflict?
Independence vs growth by merger/takeover
What is corporate social responsibility (CSR)?
Company should be sensitive to needs and wants of stakeholders
What can help ensure a firm’s long term future?
- Differentiation
- High caliber staff
- Brand strengthening
- Lower costs
- New market opportunities
- Changing social expectations
What is the result of good CSR?
Increase in profitability
why is corporate governance required?
Because of the separation between ownership and control
What are the symptoms of poor corporate governance?
- Domination of board
- Lack of supervision
- Lack of shareholder contact
- Emphasis of short-term profitability
- Misleading financial statements and info
How should the AGM be used?
Used to construct a dialogue with shareholders
What must NEDs not be?
- employee for min 5 years
- Material business interest for last 3 years
- Participate in share options
- Close family ties
- Serve as NED for more than 9 years
How much of the board should compromise of NEDs?
At least half
What do the audit committee do?
- Review work and effectiveness of internal audit function
- Monitor external auditor’s independance
- Short-list potential audit firms when change needed
