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The world of financial management, Long-run = more than one year, Short…
The world of financial management
Forms of business
Partnership - a legal contract between two or more individuals that share the ownership interests in a business
Corporation - business entity that is legally separate from the owners
Limited liability
Ease of ownership transfer
Unlimited life
Sole trader
Corporation stakeholders
Typical shareholders for a business corporation include:
Managers
Employees
Shareholders
Suppliers
Customers
Community etc
Objectives of stakeholders:
Managers
Maximise profit
Maximise sales
The community
Create jobs
Invest in local community
Enviromental
Shareholders
Maximise wealth
Customers
Pay lowest price
Achieve highest quality
Maximise satisfaction
The primary objective
To maximise shareholder wealth
Wealth maximisation
Wealth is the market value (current market price) of ordinary
shares
Wealth is the market value of ordinary shares
Balancing risk and return
Shareholder wealth maximisation involves selecting investment that provide the highest return in relation to the risks involved
Wealth maximisation is
not
the same as profit maximsation
Wealth maximisation versus profit maximisation
Lack of objectivity
Long-run v short-run issues
Quality (risk) of earnings
Lack of precision
Cash
Maximising - seeking the maximum level of return (e.g higher risk and management workloads
Satisfying - holding returns at a satisfactory level, avoiding risky ventures and reducing workloads
Criticism of shareholder wealth maximisation
Wealth maximisaition may encourage unethical behaviour
Financial management can be broken down into 3 major decisions
Financing decision
Dividend decision
Investment decision
Investment decisions
Capital budgeting (long term assets)
Working capital management
The financing decision
Before a business can invest in anything it needs to have some finance
A key financial management decision is the identification of the most appropriate sources
Taking into account:
the likely demands of investors
amount likely to be made available
the requirements of the company
The roles of managers
strategic management
developing business objectives and formulating a strategy to achieve them
risk management
identifying and properly managing business risks
operations management
day to day control over various business functions to ensure things go according to plan
The finance function is used as an instrument to help managers with these roles
Role of finance function
Investment appraisal
Investment appraisal is the analysis done to consider the profitability of an investment over the life of an asset alongside considerations of affordability and strategic fit.
Financing and capital market operations
Managers identify and evaluate sources of finance
Financial planning
Managers should assess the potential impact of proposals on future financial performance and position
Financial control
Managers must ensure things stay on course
Long-run = more than one year
Short-run = less than one year