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FM - Financial Management > Chapter 1 - The financial management function > Flashcards

Chapter 1 - The financial management function Flashcards

1
Q

What is financial management concerned with?

A

the efficient acquisition and deployment of both short- and long-term financial resources, to ensure the objectives of the enterprise are achieved.

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2
Q

Decisions must be taken in what 3 key areas?

A

Investment - both long-term investment in NCA and short-term in working capital
Finance - from what sources should funds be raised?
Dividends - how should cash funds be allocated to shareholders and how will the value of the business be affected by this?

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3
Q

What will a finance manager take care of?

A
  • the organisation’s commercial and financial objectives
  • the broader economic environment in which the business operates
  • the potential risks associated with the decision and methods of managing that risk
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4
Q

What does a investment appraisal consider?

A

the long-term plans of the business and identifies the right projects to adopt to ensure financial objectives are met.

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5
Q

What is working capital concerned with?

A

the management is concerned with the management of liquidity - ensuring debts are collected, inventory levels are kept at the min level compatible with efficient production, cash balances are invested appropriately and payables are paid on a timely basis.

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6
Q

What is a key finance management decision?

A

the identification of the most appropriate sources (be it long - or short-term), taking into account the requirements of the company, the likely demands of the investors and the amounts likely available.

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7
Q

What is management accounting?

A

concerned with providing information for the more day-to-day functions of control and decision making

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8
Q

what is financial accounting?

A

concerned with providing information about the historical results of past plans and decisions

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9
Q

Management accounting and financial management are both concerned with what?

A

the use of resources to achieve a given target

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10
Q

What is the main difference between management accounting and financial management?

A

the time scale

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11
Q

What is financial management concerned with?

A

the long-term raising of finance and the allocation and control of resources.

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12
Q

What does financial management involve?

A

targets, or objectives, that are generally long-term by nature.

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13
Q

What timescale does management accounting normally operate?

A

12-month time horizon

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14
Q

What is management accounting concerned with?

A

providing information for more day-to-day functions of control and decision-making.

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15
Q

What will management accounting involve?

A

budgeting, cost accounting, variance analysis, and evaluation of alternative uses of short-term resources.

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16
Q

What is financial accounting concerned with?

A

providing information about the historical results of past plans and decisions.

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17
Q

What is the purpose of financial accounting?

A

to keep the owners (shareholders) and other interested parties informed of the overall financial position of the business, and it will not be concerned with the detailed info used internally.

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18
Q

Which of the different financial roles will be involved with review of overtime spending?

A

management accounting

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19
Q

Which of the different financial roles will be involved with depreciation of NCA?

A

Financial accounting

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20
Q

Which of the different financial roles will be involved with establishing dividend policy?

A

Financial management

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21
Q

Which of the different financial roles will be involved with evaluating proposed expansion plans?

A

financial management

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22
Q

Which of the different financial roles will be involved with apportioning overheads to cost units?

A

management accounting

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23
Q

Which of the different financial roles will be involved with identifying accruals and prepayments?

A

financial accounting

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24
Q

What do objectives/targets define and what does strategy consider?

A

WHAT the organisation is trying to achieve and strategy considers HOW to go about it.

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25
Q

What is the starting place for a business in regards to objectives and strategy?

A

It should recognise its overall mission or purpose and develop broad-based goals for the business to pursue to ensure it fulfils that purpose.

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26
Q

What is each goal broken down into?

A

Detailed commercial and financial objectives, each of which should have appropriate identifiable, measurable targets so that progress towards them can be monitored.

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27
Q

What is the distinction between ‘commercial’ and ‘financial’ objectives?

A

to emphasise that not all objectives can be expressed in financial terms and that some objectives derive from commercial marketplace considerations.

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28
Q

How are commercial and financial objectives cascaded down throughout a organisation?

A

through the setting of targets so that all parts of the business are working to achieve the same overall goal.

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29
Q

Once objectives and targets are set what will the enterprise do?

A

It must work to achieve these targets and objectives by developing and implementing appropriate strategies.

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30
Q

What is corporate strategy concerned with?

A

the decisions made by senior management about matters such as the particular business the company is in, whether new markets should be entered or whether to withdraw from current markets.

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31
Q

What business strategy concerns with?

A

the decisions to be made by the separate strategic business units within the group.

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32
Q

What will each unit in a business strategy do?

A

Try to maximise its competitive position within its chosen market. This may involve for e.g., choosing whether to compete on quality or cost.

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33
Q

What is operational strategy concerned with?

A

how the different functional areas within a strategic business unit plan their operations to satisfy the corporate and business strategies being followed.

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34
Q

What are the potential problems with adopting an objective of profit maximisation?

A

Long-run versus short-run issues.
Quality (risk) of earnings
Cash

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35
Q

What is the long-run vs short-run problem?

A

Possible to boost short-term profits at the expense of long-term profits. e.g., discretionary spending on training, advertising, maintenance and R&D may be cut. This will improve short-term profits but damage long-term prospects

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36
Q

What is quality (risk) of earnings?

A

Business may increase its reported profits by taking a high level of risk. This risk may endanger the returns available to shareholders.

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37
Q

What is cash problem?

A

accounting profits are just a paper figure. Dividends are paid with cash. Investors will therefore consider cash flow as well as profit.

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38
Q

What is earnings per share (EPS) growth?

A

A widely used measure of corporate success as it provides a measure of the return to equity holders. EPS growth is a commonly pursued objective.

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39
Q

How do you find the EPS?

A

Calculated as profit after tax and preference share dividends divided by the number of shares in issue.

40
Q

What is EPS a measure of?

A

profitability not wealth generation

41
Q

What is a disadvantage of EPS?

A

that it does not represent income of the shareholder. Rather, it represents that investor’s share of the income generated by the company according to an accounting formula

42
Q

What is maximising?

A

seeking the maximum level of returns, even though this might involve exposure to risk and much higher management workloads.

43
Q

What is satisficing?

A

finding a merely adequate outcome, holding returns at a satisfactory level, avoiding risky ventures and reducing workloads

44
Q

What is a stakeholder group?

A

one with a vested interest in the company

45
Q

Who are the internal stakeholders?

A

company employees
company managers/directors

46
Q

Who are connected stakeholders?

A

Equity investors (ordinary shareholders)
Customers
Suppliers
Finance providers (debt holders/bankers)
Competitors

47
Q

Who are the external stakeholders?

A

the government
the community at large
pressure groups
regulators

48
Q

What is the stakeholder biew?

A

involved balancing the competing claims of a wide range of stakeholders, and taking account of broader economic and social responsibilities

49
Q

Which professor is a advocate for the stakeholder view?

A

Professor Charles Handy

50
Q

What does Professor Handy argue?

A

that maximisation of shareholder wealth, while important, cannot be the single overall objective of businesses, and account must be taken of broader economic and social responsibilities.

51
Q

What are equity investors?

A

Ordinary shareholders - provide the risk finance. Strong argument to maximise the wealth of EI.

52
Q

How does a business attract funds?

A

The company has to compete with risk-free investment opportunities e.g., government securities

53
Q

What is the agency theory?

A

often used to describe the relationships between the various interested parties in a firm and can help to explain the various duties and conflicts that occur.

54
Q

When do agency relationships occur?

A

when one party, the principal, employs another party, the agent, to perform a task on their behalf. e.g., directors (agents) act on behalf of shareholders (principals)

55
Q

What are some examples of allegations that were made in regards to management making decisions in their own interest?

A
  • Remuneration
  • empire building
  • creative accounting
    -off-balance-sheet finance
  • takeover bids
  • unethical activities
56
Q

What is creative accounting?

A

Directors selecting accounting policies, can flatter their published accounts to artificially boost the share price.

57
Q

What are some examples of creative accounting?

A

Capitalising on expenses on the SFP, not depreciation NCA, maximising the value of intangibles on the balance sheet

58
Q

What is off-balance-sheet finance?

A

Refers to ways of financing assets where the method of funding is not recorded on the balance sheet

59
Q

What is an example of off-balance-sheet finance?

A

Quasi-subsidiaries- which financial liabilities are moved so that they don’t appear in the parent companies balance sheet

60
Q

What is a takeover bid?

A

Board of directors spend time and money to defend the company against a takeover to save own job but might be in best interest of company

61
Q

What are some examples of unethical activities?

A

Trading with companies ruled by dictatorship, testing products on animals, emitting pollution

62
Q

What is a managerial reward scheme?

A

Ensure that managers take decisions which are consistent with the objectives of shareholders is to introduce remuneration packages.

63
Q

How should managerial reward schemes be set up?

A

Be clearly defined, impossible to manipulate and easy to monitor
Link rewards to changes in shareholder wealth
Match managers time horizons with shareholders horizons
Encourage managers to adopt same attitudes to risk as shareholders

64
Q

What are some common types of reward schemes?

A

-remuneration linked to:
Minimum profit levels
Economic value added (eva)
Revenue growth
- executive share option schemes (esop)

65
Q

What are some dis adv of remuneration linked to minimum profit levels?

A

Scheme may lead to managers taking decisions that would result in profits being earned in the short-term at the expense of long term profit

66
Q

What is Economic value added (EVA) a measure of?

A

The increase in the value of shareholder wealth in the period

67
Q

What is a disadvantage on EVA?

A

Calculating bonus may be complex

68
Q

Growth of the business and higher production levels can lead to what?

A

Economies of scale, which can help the business compete more successfully on price

69
Q

What is a disadvantage of remuneration linked to revenue growth?

A

Revenue growth could be achieved at the expense of profitability e.g., by reducing selling prices or by selecting high revenue product lines, which may not necessarily be the most profitable

70
Q

What is an advantage of an executive share option scheme (ESOP)?

A

It will encourage managers to maximise the value of the shares of the company

71
Q

How are executive share option schemes set up?

A

Over a relatively long period, thereby encouraging managers to make decisions to invest in positive return projects, which should result in an increase in the price of company shares

72
Q

What are some criticisms of ESPOs?

A

When directors exercise their share options they tend to sell the shares almost immediately to cash in their profit
Directors may distort reported profits to protect the share price and the value of their share options

73
Q

What are some characteristics of non-executive directors (NEDs)?

A
  • important presence on the board
  • must give obligation to spend sufficient time the the company
  • should be independent
  • at least half the board to be independent NEDs
74
Q

What are some characteristics of executive directors?

A
  • separation of chairman and chief executive officer (CEO)
  • submit for re-election
  • clear disclosure of financial rewards
75
Q

what are NEDs?

A

Directors who do not take part in the running of the business.
Attend board meetings
Provide advice
Listen to what is said and are generally meant to act as a control on the actions of the executive directors

76
Q

What does independence mean in regards to NEDs?

A

they are free of any business or other relationship, which could materially interfere with the exercise of their independent judgement.

77
Q

What will the board disclose in the annual report in regard to NEDs?

A

Which NEDs are considered to be independent

78
Q

Will NEDs get share options?

A

No, because this may encourage corporate excess or wrong doing

79
Q

How many independent NEDs will be appointed as senior independent NED and what will be their role?

A

One, to act as a champion for the interests of the shareholders.

80
Q

What will be conduced before a prospective NED takes on the role?

A

a due diligence

81
Q

Who are the executive directors?

A

CEO and Chairperson

82
Q

How often should a executive director submit themselves for re-election?

A

at least every 3 years

83
Q

Boards should set as their objective the reduction of directors’ contract period to what?

A

one year or less

84
Q

What is ratio analysis?

A

compares and quantifies relationships between financial variables

85
Q

Ratio analysis can be grouped into what 4 categories?

A
  • profitability and return
  • debt and gearing
  • liquidity
  • investor
86
Q

What is the objective for a NFP?

A

not to make money but to benefit prescribed groups of people

87
Q

What 2 questions can be asked for NFP in regards to objectives?

A
  • in whose interest is it run?
  • what are the objectives of the interested parties?
88
Q

What is VFM?

A

Value for money can be defined as ‘achieving the desired level and quality of service at the most economical cost’.

89
Q

What are the 4 main objectives in the system analysis for NFP?

A

Inputs
Processes
Outputs
Outcomes

90
Q

What are the inputs in regards to the organisation as a system?

A

Materials
cash
staff

91
Q

What are the processes in regards to the organisation as a system?

A

Interaction of people, structure, information and task requirements

92
Q

What are the outputs in regards to the organisation as a system?

A

goods
services

93
Q

What are the outcomes in regards to the organisation as a system?

A

meeting
planning
objectives

94
Q

What are the 3 E’s and what are the tied to in relation to the organisation system?

A

Economy - inputs
Efficiency - Processes and outputs
Effectiveness - outcomes

95
Q

What is efficiency?

A

systems and methods - Ratio of outputs to inputs - achieving a high level of output in relation to the resources put in (input driven) or providing a particular level of service at reasonable input cost (output driven)

96
Q

What is economy?

A

costs and control - minimising the costs of inputs required to achieve a defined level of output

97
Q

What is effectiveness?

A

achieving targets - whether outputs are achieved that match the predetermined objetcives

FM - Financial Management (10 decks)

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