Financial Management Purpose Flashcards
What is financial management?
Use of financial resources to achieve key objectives
Main financial objective of a business?
Profit maximisation
What is a financing decision?
Mainly focuses on how much debt a firm uses
What is an investing decision?
Involves deciding whether or not to invest in projects (how beneficial they are to investors)
What is a dividend decision?
Whether or not to return surplus cash to shareholders.
Issues with profit?
Historic and not future-oriented
Does not measure liquidity and risk
Can be manipulated
How does dividend decision relate to shareholder wealth?
How much a firm has spent on investments and how much finance must be raised externally
What is risk management?
What type of finance to raise, how to ivnest it, and whether dividend can be paid
Issues with profit?
Historic
Does not measure liquidity or risk
Accounting policies manipulate it
What are distributable profits after?
Interest, tax and preference dividends
How do shareholders get wealthy?
Dividends received
Market value of shares
Market share corporate objective?
Certain level of market share are critical to be effective
Social responsibility corporate objective?
Environmental concerns
Survival corporate objective
In recession, short-term survival is needed
An example of an agent?
Managers acting on behalf of business owners
Why neglect risk management is an agency problem?
Greater focus on profit
Why importance of short-term profits is an agency problem?
Cutting back on investments to meet short-term targets
Why minimise dividend payments is an agency problem?
Frees up funds to use in business
Why boost pay and perks for bosses is an agency problem?
Damages shareholder wealth
Corporate governance?
Rules and processes by which behaviour is directed
Goal congruence?
Alignment between objectives of agents acting within an organisation and organisation as a whole
Renumeration incentives
PRP
Share options
What is PRP?
Pay or bonuses are usually related to size of profits
What is share options?
Selected employees are given a number of share options, where holder has a choice to subscribe
Most important stakeholders
Shareholders
Examples of debt ratios?
Gearing
Interest cover
Value for money characteristics?
Economy
Efficiency
Effectiveness
Financial accounts purpose
Details performance of organisation over defined period
Management accounts purpose
Aid management to control activities
Financial accounts legality
Must prepare financial accounts
Management accounts legality
No legal requirement to prepare management accounts
Financial accounts format
Law and accounting standards
Management accounts format
Entirely at management discretion
Financial accounts scope
Historic
Management accounts scope
Historical and future
Why is management accounting different from financial accounting?
Forward looking
Directly used for decision making
Has no set format
The types of financial management?
Financing
Investing
Dividends
Issue with an increase in dividends?
Will reduce the level of retained cash and increase the need for external finance (financing) for investment projects
Issue with an increase in capital expenditure (investing decision)?
Increases the need for finance and if internal source, reduces dividend
What is a quoted company?
A company which publishes financial statements. ROCE is important
Variance analysis use in management accounting?
May help control costs of new projects
What can a company do with profits?
Either pays it out as dividends
Or reinvests future growth in business
TSR advantage (growing finance)
Hhighest returns for its investors will find it easiest to raise new finance and grow in the future
TSR advantage (custoemrs)
Those that are providing customers with what they require
TSR advantage (risk of takeover)
May become targets for hostile takeovers
TSR disadvantage (market imperfections)
Might not be in the public interest to allow monopolies to maximise return
TSR disadvantage (social needs)
It ignores social needs
TSR disadvantage (stakeholders)
It ignores stakeholders
issue with profit maximisation (market)?
Share price is often influenced more by overall stock market conditions than the company’s individual performance
issue with profit reliabiltiy (equity)?
Value of the company’s equity is more closely connected with its cash generation than accrual-based accounting profits
issue with profit reliabiltiy (manipulation)?
Profit is at risk of manipulation
