The Financial Management function

Question 1

Where does Financial Management sit within the overall accounts function of a business?

Answer 1

Financial management focuses on the acquisition and use of the business financial assets to achieve the business objective and predominantly maximise shareholder wealth.

Financial and Management accounting work as reporting and analysis functions for the business.

• Financial - reporting on business past performance. For statutory purposes but the information produced can be used to measure overall business performance towards objectives and quantify both growth and increase in shareholder wealth.
• Management - Looking at performance over shorter periods with the aim of establishing areas of improvement and areas requiring improvement.

Question 2

How are corporate and Financial objectives and Corporate strategy related?

Answer 2

Simply put the objective is what must be achieved the strategy is how it will be achieved.

Corporate and Financial objects are either driven or the driver of the other e.g

• Corporate objective is to expand in to new markets, so the financial objective would be related to improvements in Profit ratios.
• The strategy for this objective would then be how the business reaches new markets - launch existing products/Acquire business with existing access to the market..

Question 3

What different levels of strategy might be implemented within a business as a whole?

Answer 3

• Corporate - Set at senior management level. Relates to objective which will affect the business as a whole.
• Business - Set by strategic business units within the company, i.e. units operating in different market places or geographic areas.
• Operational - relates to the different functions within a business unit, will be set based on achieving business and corporate objectives.

This is essentially a cascade effect with Corporate strategy cascading down to affect other strategy.

Question 4

How are Financial objective recognised?

Answer 4

• Shareholder Wealth Maximisation - given that most companies are owned by shareholders this is the default objective. It may be recognised through increased share price and/or dividend payout)
• Profit maximisation - This is not intrinsically linked to increases in share price(Tesla) And can be manipulated to give improved shorter results at the detriment of long term results.
• Earnings per share Growth - Provides a measure of return to Equity, however can be manipulated as is also linked to profit.

Maximising vs Satisficing - a business may have to balance between maximising returns to some groups and satisfying other groups to achieve the best overall outcome.

Question 5

What types of stokeholds will a business have?

Answer 5

• Internal - Managers/Directors, Employees - will be interested in how business performance affects their job stability and their income from employment.
• Connected - Equity investors, Customers, Suppliers, Competitors & finance providers - interested in overall business stability, ability to meet obligations and level of returns.
• External - Government, regulators, Pressure groups & community at large - will be interested in the business operating correctly under statutory and legislative rules, along with social, economic and environmental impact on the community and wider environment.

Obviously there will be conflict between the different stakeholder needs meaning that the business will need to establish where to maximise and where to satisfy.

Question 6

What role does management play in meeting shareholder objectives?

Answer 6

Senior management (Directors) effectively operate under an Agency agreement with the Shareholders where the shareholders are the principle and Directors are agent.

There is therefore the potential for incongruency between the Shareholders objectives and the directors actions in meeting those objectives.

To help eliminate this there are a number of partial solutions:

• Managerial reward schemes - essentially rewarding behaviour/performance that achieves shareholder objectives.
  
  • Regulatory requirements - Non executive directors, transparency when setting director remuneration, Separation of CEO and Chairperson roles

Question 7

What difference would we see in the financial and corporate objectives for Non for Profit organisations?

Answer 7

Primarily the Non-financial objectives would be the most important, think NHS trusts, these are also likely to be more complex, conflicting and difficult to measure in financial terms.

As most NFP’s are run for the benefit of specific groups the objectives will be based on the interests of those groups.

Question 8

How is the performance of an NFP measured?

Answer 8

As most outcomes for this type of organisation are intangible and virtually impossible to place a financial value on Value for Money will likely be the basis for establishing performance.

Value for Money (VFM) and the 3 E’s

• Economy - Looking at inputs to the organisation process, costs and cost control.
• Efficiency - The organisations processes, systems and methods of working.
• Effectiveness - Has the organisation met the planned objectives? i.e Patients seen, cases resolved ect.

Question 9

What are the three key areas that Financial management makes decisions in?

Answer 9

• Investment - Long term in non current assets and short term in working capital.
• Financing - what sources should funds needed for investment be raised from?
• Dividend - how should cash funds be allocated to shareholders had how will the value of the business be affected.

Consider…

Each decision will be impacted by a variety of internal and external factors such as, business objectives, NPV of cashflows, changes to macroeconomic policy.