Financial management environment Flashcards
Fiscal policy determines how Governments raise and spend money:
Taxation and Government spending affect the amount that companies and individuals have
available for spending and hence impact on demand and output
Hence increasing taxation levels or decreasing public expenditure should decrease demand and
output.
Tax, Spend, Borrow.
Monetary policy is used by Governments to regulate the supply of money:
The broad aim of monetary policy is to achieve price stability by influencing the level of demand
in the economy
One aspect of monetary policy is interest rate policy, where central banks change interest rates
to change the price of and hence demand for money
Central banks can also increase the supply of money by repurchasing Government debt from
banks (known as quantitative easing)
Increasing the supply of money (by reducing interest rates or quantitative easing) should make
borrowing cheaper and hence increase demand
Exchange rate policy describes Government’s attempts to influence exchange rates:
Current policy in the UK is to allow a free or floating exchange rate (where demand and supply
is allowed to set the exchange rate)
Alternatives include managed and fixed exchange rate policies.
However, exchange rates are one of the factors taken into account by the Bank of England when
setting interest rates.
A higher exchange rate (1 unit of domestic currency buys a large quantity of a foreign currency)
will make imports and costs of production cheaper (hence leading to a reduction in inflation)
and make exports more expensive (reducing demand for exports)
SPICED
Strong
Pound
Imports
Cheaper
Exports
Dearer
Economic policy
When a business plans and makes decisions it may need to take into account the following factors:
Demand levels
Cost of capital - investors required return
Inflation of costs and revenues
Exchange rates if importing or exporting or competing with those that do
Government economic policy affects all of the above and so interacts with planning and decisionmaking in business.
Competition policy
Having strong competition between suppliers in a market sector should benefit consumers
though lower prices, fairer pricing and improved innovation.
However, if too much market power / share is held by a few large suppliers (oligopoly, or
monopoly), competition suffers and anti-competitive behaviour such as price-fixing or limitation
of supply could lead to higher prices and a lower quality of product / service for consumers.
Governments may seek to improve the experience for consumers via:
– Creating bodies to regulate individual market sectors (e.g. energy), with the power to set
maximum prices and minimum service levels.
– Creating bodies to regulate takeovers (to stop one provider obtaining too great a market
share as a result of mergers and acquisitions).
Hence, when businesses formulate plans for growth / investment, they need to factor the
impact of relevant competition policy into their plans (e.g. if they plan to grow via acquisition or
operate in a heavily regulated market sector).
Government assistance for business
Governments may wish to encourage certain behaviour such as organic food production, the
provision of social housing, or economic activity in deprived areas.
Without some sort of assistance it may not be economical for business to exhibit these
behaviours.
By offering assistance government (e.g. tax breaks or grants), the Government can influence the
behaviour of businesses in order to achieve the desired results. This should be considered by
companies when determining future investment decisions.
Green policies and sustainability issues
Green policies benefit society as a whole and are only effective if followed by virtually everyone;
however they tend to also have an economic cost. Therefore, unless encouraged by
government, individual businesses are unlikely to follow such policies.
Governments can influence the correct environmental behaviour by
– Incentivising greener business activities (e.g. by giving favourable tax treatments for the
purchase of environmentally friendly vehicles), or
– By punishing businesses who pollute (e.g. with a carbon tax on emissions).
These policies will need to be considered by businesses when making future plans.
Sustainability
Sustainability has no one definition but the UN describe it as “meeting the needs of the present
without compromising the ability of future generations to meet their own needs.” This includes
environmental policies to meet sustainability targets such as net zero but also incorporates
social and economic aspects.
We have already seen how government policy can be used to incentivise more environmentally
friendly behaviour by businesses. Policy to influence the correct social and economic behaviours
could include funding for business development in deprived areas and funding for new skills
training for employees.
Corporate governance regulation
Without corporate governance regulation, it would be left to the personal morality of each
director to decide on what is and what is not acceptable. As a result of competition this would
in turn lead to the lowest standard being adopted by everyone.
The Companies Act dictates that directors must, for example, promote the success of the
company for the benefit of its members, act within their powers and exercise independence,
reasonable care, skill and diligence.
14 Course Notes ACCA FM
If directors do not follow the Companies Act they can be barred from being a director or even
sent to prison.
However, several high-profile business failures demonstrated that too often directors were
tempted to act in their own best interests, rather than those of their shareholders.
Hence, as discussed in chapter 1, corporate governance controls (such as rules over board
composition) are required to ensure that the power of executive directors is checked.
Compliance with these controls may be encouraged by forcing large companies to adhere to a
corporate governance code in order to be listed on major stock exchanges in that country.
money markets are
short term (less than 12 months) interest rate markets for investing
and borrowing. Such markets exist all around the world e.g. London, New York and Tokyo.
These markets enable borrowers and lenders to manage their working capital efficiently.
capital markets are
long term (more than 12 months) debt and equity markets. Such
markets also exist all around the world e.g. London, New York and Tokyo. These markets enable
companies to manage their capital structure efficiently.
Money Market Accounts
A deposit account at a bank where the
balance is invested in the money
markets (short-term inter-bank
borrowing markets).
Overnight - 12
months
Return - Variable
Certificates of Deposit
A time deposit with a bank (≥$100k)
3 months - 5 years
Fixed rate
Repo (sale & repurchase
agreement)
Short term loan secured on specific
assets (lender actually takes
possession of secured assets)
Usually < 1 year
Fixed rate
