Financial Management Overview
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Questions and Answers

What is the primary conflict of interest between shareholders and directors in a company?

The primary conflict is that directors are hired to run the company on behalf of shareholders, which can lead to decisions that may not align with shareholders' interests.

How can companies align the interests of managers with those of shareholders?

Companies can use reward schemes that incentivize managers to make decisions in the best interests of the company.

What is the purpose of corporate governance codes?

Corporate governance codes are designed to ensure directors make decisions that are in the best interests of the company and its shareholders.

Which categories are commonly used in ratio analysis for measuring business performance?

<p>Common categories include profitability and return, debt and gearing, liquidity, and investor ratios.</p> Signup and view all the answers

What is the primary objective of a not-for-profit organization?

<p>The primary objective is to deliver a specific service or benefit rather than to make money.</p> Signup and view all the answers

What does the concept of Value for Money (VFM) assess in not-for-profit organizations?

<p>Value for Money assesses whether the organization is providing its services effectively and efficiently.</p> Signup and view all the answers

What role do Independent Non-Executive Directors (NEDs) play in corporate governance?

<p>Independent NEDs provide independent advice to the board and help achieve the company's objectives.</p> Signup and view all the answers

Why is financial management important for not-for-profit organizations?

<p>Financial management is crucial for effectively allocating available funds to programs and activities.</p> Signup and view all the answers

What is the primary objective of shareholder wealth maximization?

<p>The primary objective is to maximize the company's value to its shareholders by increasing share price and dividend payout.</p> Signup and view all the answers

Explain how profit maximization can conflict with shareholder wealth maximization.

<p>Profit maximization can focus on short-term gains which may compromise long-term sustainability, thus not necessarily increasing shareholder wealth.</p> Signup and view all the answers

What factors can lead a company to have high profits but low cash flow?

<p>Factors such as high expenses for growth initiatives or risky operations can result in high profits but not sufficient cash flow.</p> Signup and view all the answers

What defines a stakeholder group in the context of a company?

<p>Stakeholder groups are individuals or entities with an interest in the company, including employees, managers, customers, and suppliers.</p> Signup and view all the answers

What does the Stakeholder View advocate regarding corporate responsibilities?

<p>The Stakeholder View advocates that companies should maximize shareholder wealth while also considering the needs of all stakeholders.</p> Signup and view all the answers

Describe Agency Theory in the context of corporate governance.

<p>Agency Theory explains the relationship between principals, such as shareholders, and agents, like managers, who are hired to perform tasks on behalf of the principals.</p> Signup and view all the answers

How can the quality of earnings affect shareholder perceptions?

<p>The quality of earnings can affect perceptions if earnings come from risky operations, making them less sustainable over the long term.</p> Signup and view all the answers

What is a potential downside of maximizing short-term profits?

<p>Maximizing short-term profits may lead to underinvestment in critical areas like research and development, harming long-term prospects.</p> Signup and view all the answers

What is the primary purpose of financial management?

<p>The primary purpose of financial management is to ensure the efficient use of financial resources to achieve the organization's goals.</p> Signup and view all the answers

How do financial management and financial accounting differ?

<p>Financial management focuses on the planning and control of financial resources, while financial accounting primarily deals with recording and reporting financial transactions.</p> Signup and view all the answers

What are two key financial objectives organizations may pursue?

<p>Shareholder wealth maximization and profit maximization are two key financial objectives that organizations may pursue.</p> Signup and view all the answers

What is agency theory in the context of financial management?

<p>Agency theory explains the relationship between principals (shareholders) and agents (management), focusing on conflicts of interest and aligning their goals.</p> Signup and view all the answers

What impact does not-for-profit status have on financial objectives?

<p>Not-for-profit organizations focus on achieving social goals rather than profit maximization, which affects their financial objectives.</p> Signup and view all the answers

Why is the dividend decision important for a company?

<p>The dividend decision is important because it affects the amount of profit distributed to shareholders and the amount retained for reinvestment.</p> Signup and view all the answers

Describe the financing decision in financial management.

<p>The financing decision involves determining the optimal mix of debt and equity to finance the company's operations effectively.</p> Signup and view all the answers

What are managerial reward schemes designed to achieve?

<p>Managerial reward schemes are designed to align the interests of management with those of the stakeholders, encouraging them to meet organizational objectives.</p> Signup and view all the answers

Flashcards

Financial Management

The process of planning, directing, and controlling the financial resources of an organization to achieve its goals.

Management Accounting

Focuses on providing information for internal decision-making, while financial accounting focuses on external reporting.

Corporate Objectives

The overall strategies and long-term goals of an organization.

Financial Objectives

A set of specific, measurable, achievable, relevant, and time-bound goals that guide the organization's financial activities.

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Shareholder Wealth Maximization

The primary financial objective, usually the one that shareholders are most concerned with, which aims to maximize the long-term value of the company for its owners.

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Profit Maximization

A financial objective that focuses on increasing the company's profits, but doesn't necessarily consider other factors like shareholder value or long-term sustainability.

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Dividend Decision

The decision of how much of the company's profits to distribute to shareholders as dividends and how much to retain for future growth.

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Stakeholder

A group or individual that has a stake in the success of a company. Stakeholders can include employees, customers, suppliers, creditors, and the community.

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Long-run vs. Short-run Issues

Short-term profit-seeking actions can harm long-term company prospects.

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Quality of Earnings

A company might generate high profits but through risky means, making the earnings unsustainable.

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Cash Flow

Shareholders are ultimately interested in the company's cash flow, not just profits.

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Stakeholder Groups

Groups with an interest in the company, including internal stakeholders like employees and external stakeholders like customers.

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The Stakeholder View

The view that companies should consider the needs of all stakeholders, not just shareholders.

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Agency Theory

Explains how a principal (like a shareholder) interacts with an agent (like a manager) to achieve shared goals. However, misaligned interests can lead to challenges.

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Shareholder and director conflict

A conflict that arises when the interests of shareholders and directors, who are hired to run the company on behalf of the shareholders, are not aligned.

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Reward schemes for managers

Reward systems that incentivize managers to make decisions that benefit the company and its shareholders.

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Corporate Governance Codes

Codes that provide guidance and principles for directors to make decisions that are in the best interests of the company and its shareholders.

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Ratio Analysis

A method of analyzing a company's financial performance by comparing key ratios over time.

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Not-for-profit objective

The primary goal of a not-for-profit organization is to deliver a specific service or benefit, not to make money.

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Value for Money (VFM)

A concept used to evaluate the effectiveness of a not-for-profit organization, focusing on whether services are delivered efficiently and efficiently.

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Independent Non-Executive Directors (NEDs)

Independent directors on a company's board who provide unbiased advice and hold the company accountable for its performance.

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Financial management for not-for-profit organizations

The process of planning and managing a not-for-profit organization's finances, including budgeting and allocating funds.

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Study Notes

Financial Management Function

  • Financial management involves explaining the nature and purpose of financial management, distinguishing between financial management and financial/management accounting, and discussing the relationship between financial objectives, corporate objectives, and corporate strategy.
  • Various financial objectives include shareholder wealth maximization, profit maximization, and earnings per share growth.
  • Stakeholders have different objectives and potential conflicts.
  • Management plays a role in meeting stakeholder objectives using agency theory, managerial reward schemes, and regulatory requirements.
  • Not-for-profit organizations focus on Value for Money, and measuring objective achievement is important.

Three Key Areas of Financial Management

  • Financing decisions: Sources of finance, cost of capital, and capital structure are crucial.
  • Investment decisions: Investment in non-current assets like investment appraisal (NCA) and working capital management are included.
  • Dividend decisions: Business valuation, efficient markets, and the decisions involved in dividends.

Financial Management Function - Detailed

  • For a business to succeed, it needs efficient working capital management. Managing liquidity, inventory levels, cash balances, and payables are key.
  • Businesses need to identify and acquire appropriate financing (short/long-term) considering company requirements, investor expectations, and available funds.
  • Dividend decisions involve returning profit to shareholders or reinvesting it for future growth.

Relationship Between Corporate Strategy and Financial Objectives

  • Objectives/targets define what the organization seeks to achieve.
  • Strategy outlines how the organization will achieve those objectives.
  • A diagram illustrates how corporate strategy (top-level) flows down to detailed, operational strategies.
  • Financial management decisions support these strategic goals in businesses.

Objectives and Strategies

  • Financial and commercial objectives are cascaded down through the organization.
  • Commercial objectives focus on the business's marketplace position.
  • Financial objectives are tied to the overall goal of increasing shareholder value.
  • Strategies are plans for achieving these objectives.

Financial Objectives of Financial Management

  • Shareholder wealth maximization is a fundamental principle of financial management.
  • Profit maximization is another significant objective.
  • Growth, market share, and social responsibility are additional, but important objectives for companies.
  • Earnings per share (EPS) growth is a widely used metric.

Stakeholder Objectives and Conflicts

  • Stakeholders are groups with an interest in a company (employees, customers, suppliers).
  • Conflicts of interest exist among stakeholders.
  • Management must balance the needs and objectives of all stakeholders.
  • Shareholders, for example, want high returns, while other stakeholders may focus on other aspects, such as employment, community, or the environment.

Agency Theory

  • Agency theory deals with the relationship between principals (e.g., shareholders) and agents (e.g., managers) in companies.
  • Potential conflicts of interest exist because agents may act in their own self-interest and not in the best interests of the principals.
  • Directors, for example, may prioritize their own compensation or prestige over shareholder welfare.

Corporate Governance

  • Issues like compensation (executive pay), director accountability, the role of non-executive directors (NEDs), and the separation of chairman and CEO roles are part of corporate governance.
  • The company's reward scheme for its directors and executives is a crucial element of corporate governance.

Value for Money (VFM)

  • VFM is a critical concept for not-for-profit organizations (NFPs).
  • It balances desired outcomes (e.g., quality) with associated costs.
  • Assessing VFM requires detailed analysis and measurement of inputs, processes, outputs, and outcomes.

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Financial Management Function PDF

Description

This quiz explores the fundamental concepts of financial management, including the distinction between financial management and accounting. It also covers financial objectives, stakeholder relationships, and key decision areas such as financing and investment. Test your knowledge on the essential elements and theories of financial management.

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