Corporate Governance and Organisation Flashcards
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Corporate Finance Cycle
Corporate Objectives (How to use the returns from investment) ->
Finance decisions (How to raise the money) ->
Investment Choice (How to invest the money) ->
Different types of business
Sole traders (one person, not protected by company)
Partnerships (minimum of two traders, legal agreement to split, no legal protection)
- LLP (Limited Liability Partner) (separate identity with legal protection)
Limited companies (separate identity, owner puts capital in)
- Private (not listed on exchanges)
- Public (needs minimum £50,000 capital, more protection)
- Quoted/unquoted on a stock exchange
Social enterprises/charities (non profit)
Why does a business need finance?
- To deal with financial consequences of adverse events
- Provides a cushion
- Build up funds (for expansion etc.)
- Start-up capital (obtain premises, hire staff, purchase equipment etc.)
- Cash flow management
- Demonstrate financial strength
Golden concepts
Short term vs long term
Established vs start up
Prospering or struggling
Size of business
Type of business (assets/liabilities)
Underpins that facilitate Business Finance
Support/basis for Business Finance
- Financial Reporting (reports, accounts, public information for investors)
- Regulation of financial reporting (to ensure reliability and usefulness, consistency)
- Corporate governance (arrangement of senior management roles)
Linked to hygiene factor
Hygiene Factor
Factors that will make a worker unhappy if not provided (motivational elements)
Links to ideal situation where employees are motivated, low levels of complaints etc.
Underpins are important because of the hygiene factor - investors and stakeholders need assurance of well-run companies and for information to be available for them to assess financial situations.
Corporate Governance definition
System of rules, practices and processed by which a company is directed and controlled
Board of Directors have overall responsibility and are appointed by shareholders
Focuses on
- Transparency
- Accountability
- Long term success
- Probity (ethical behaviour)
- Principles (another card)
Board of Directors
Appointed by the shareholders
Have overall repsonsibility
Job:
- Strategic policy
- Manage business
- Report to shareholders
Stakeholders (named and importance)
Internal - business owner/finance providers/shareholders/directors/employees
External - creditors/auditors/customers/suppliers/government
Important because they engage with the corporation in some way or another. Benefits may include dividends, salary, bonuses etc.
Dividend meaning
A sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves)
External stakeholders (named and the split)
Creditors/auditors/customers/suppliers/government
Split into two:
- Daily business (clients, suppliers, financial lenders)
- Analysis (government, tax, public, corporate social responsibility (ESG))
ESG meaning
Environmental, social and governance
Sources of Finance - Raising money
Internal Finance
- Retained Earnings
- Working Capital
External Finance
- Financial Institutions
- Financial Markets
External Finance (examples)
Financial Institutions - bank loans
- Merchant banks (deals in commercial loans and investment)
- Commercial banks (for the public)
- Pension funds
- Insurance funds
- Government
- Lottery funds
Financial Markets - sell shares/issue loan stocks
- Money markets
- Capital markets
Internal Finance
Contribute own savings
Gifts/loans from friends/family/others
Sources of Finance - Resources
Non-current assets (long-term assets that have a useful life of more than a year)
- Premises
- Computers
- Other IT equipment
Current assets (held for a short period)
- Data reports
- Working materials
Assets (types)
Non-current (illiquid assets >1 year)
- Tangible
- Intangible
Current (liquid <1 year)
- Receivables (money owed to company)
- Prepayments (paid for but not yet received)
- Cash
Long-term investments
- Shares (in subsidiaries, associates)
- Pension funds
Responsibilities in a company
CEO
CFO/Controller
Treasurer
CEO
- Reports in to Board of Directors
- Overall responsibility
CFO/Controller (practice question lecture 6 22/01/2025)
- Oversees and makes financial decisions (how should money be raised?)
|–> Investment/Capital Budgeting (what to invest in?) - Is the link between firm’s operations and financial markets
- Managers from all areas report to CFO
- Wrong decisions could have severe consequences so should have a clear understanding of available options and the way the markets work
- Must gather interested parties to understand full implications of investment decisions (project managers, legal experts etc.)
Treasurer
- Responsible for company cash
- Raises new capital
- Manages relationships (banks, shareholders, investors etc.)
Agency theory
‘Agency’ - the passing of control/activity from principal to agent
e.g. ‘Principal’ - shareholder
e.g. ‘Agents’ - directors
‘Agency costs’ - economic situation when it has less value than if the principal were to do the activity themselves. (e.g. directors take undue risks, Empire Building - big, not profitable etc.)
CAPITAL BUDGETING
look at notes
AKA Investment Decision (what is the best investment? how to measure it?)
Necessary because there are so many economic options (unlimited ways to invest)
Involves complex analysis - implications of poor decisions? short term or long term? growth implications?
Many decisions need to be made: time periods, financing methods, alternative capital assets
Example Question:
A project costs £1.5m, and is expected to bring in a net cashflow of £500,000 each year for the next 4 years. If the interest rate is 10% p.a. effective, is the project worth doing?
(Numbers in thousands)
Consider the present value of future cashflows
= out + inv^1 + inv^2 + inv^3 + inv^4
= -1,500 + 500/(1.1)^1+ 500/(1.1)^2 + 500/(1.1)^3 + 500/(1.1)^4
= +84.95 (84,950)
= As present value is positive return will be at least 10%
= Worth doing!
