Financial Management Function

Question 1

What three key areas must decisions be taken in?

Answer 1

Investment Decisions- long-term investments in NCA’s and short-term in working capital
Financing Decisions- where should funds be sourced form
Dividend Decisions- how should cash funds be allocated to shareholders and will it affect the business

Question 2

What are the financial management function roles?

Answer 2

Management accounting- control of decision making and provide info on day-to-day functions
Financial Accounting- providing info about historical results of past plans and decisions
Impact of external economic forces- interest rates inflation ect to be considered before objectives can be set
Conflicts - between stakeholders

Question 3

What is shareholder wealth maximisation?

Answer 3

Fundamental principal of financial management increasing the wealth of shareholders

Question 4

What are some other objectives of a company other than shareholder wealth?

Answer 4

Profit maximisation, growth, market share, social responsibility

Question 5

What is ratio analysis?

Answer 5

Used to measure the companies progress against its objectives. Compares and quantifies relationships between financial variables

Question 6

What would create divorce of ownership and control?

Answer 6

Remuneration, Empire building, Creative accounting, Off-balance-sheet funding, Takeover bids, Unethical behaviour and activities

Question 7

What can be used to ensure managers make decisions based no the objectives of a company?

Answer 7

Managerial reward schemes

Question 8

What are the key parts of a managerial reward scheme?

Answer 8

Clearly defined
Imposibile to manipulate
Link reward changes to shareholder wealth
Match manager time horizons to shareholder time horizon
Encourage managers to adopt the same attitude to risk as the shareholders

Question 9

What are the Corporate Governance codes linking to NED’s and Executive directors?

Answer 9

NED’s have an important presence on the board - must give obligation to spend sufficient time with the company - should be independent

Executive Directors separation of the chairman and CEO - Submit for re-election - clear disclosure of financial rewards - outnumbered by the NED’s

Question 10

What is VFM?

Answer 10

Value For Money: achieving the desired level and quality of service at the most economical cost

Question 11

How can VFM be measured?

Answer 11

Economy- minimise input cost
Efficiency- ratio of outputs to inputs - achieve a high level of output in relation to the resources provided or the service being provided at a reasonable level and quality
Effectiveness- wether outputs are achieved match the predetermined objectives