Paul Lydon Notes Acca F9

Paul Lydon F9 Lecture 1 1

ACCA Paper F9ACCA Paper F9

Financial Management


Core areas of the syllabus

• Financial management function

• Financial management environment

• Working capital management

• Investment appraisal

• Business finance

• Cost of capital

• Business valuations

• Risk management


Format of the exam

• Four compulsory questions

• 25 marks each

• Balance of calculative and discursive elements in questions


AN OUTLINE OF FINANCIAL MAMAGEMENT

• Financial = Money, Cash etc

• Management:– Plan – Objectives (Corporate – Business –

Operational)– Establish Alternatives for each objective– Evaluate Alternatives then choose one– Control: ensure that actual outcomes are

inline with expected out-comes– Take control action if necessary


Financial Management compared with Management Accounting and Financial

Accounting • Financial Accounting:

– Profit and Loss for previous Period– Annual Accounts for audit etc

• Management Accounting– Short term control information (Compare budget with actual)– Costing information; Marginal/Absorption– Relevant Costing etc

• Financial Management– Long Term Finance issues (such as bank loans and leasing)– Investment Decisions (buy a new business – expand the

business)


The financial management function

• (1) Raising finance

• (2) Investing funds raised – this includes

• allocating funds and

• controlling investments

• (3) Dividend policy – returning gains to shareholders


Corporate strategy and objectives


Corporate stakeholders


Stakeholders

• A stakeholder is any party which has a vested interest in the company such as:

• Shareholders– The individuals (or other companies/pension funds

etc) who own the share capital of the company Here there is a huge difference between small/medium sized owner managed companies and larger companies where the shareholders are NOT directly involved but appoint directors/management to run the business


Stakeholders

• Shareholder wealth Maximisation• The objective of most companies is

maximise wealth for its shareholders (note the word wealth is used and NOT profit) Wealth in this context should be considered as a long term issue, for example profits could be increased in the short term by reducing R&D expenditure but as a result may lose market share in the long term


Stakeholders

• The Community at large

• Especially relates to Public Sector Enterprises (E.G Hospitals)

• Consider the impact on swords if the airport was to relocate to south Dublin

• Employees spending their wages in the area etc


Stakeholders

• Management

• Management and senior staff will have their own objectives which may not be in line with other stakeholders:

• Increase short-term profits for a bonus

• Resist Change (Privatisation/Modernisation)


Stakeholders

• Employees• Employees will depend on wages and salaries

not only for day to day expenditure but will also seek secure long term employment to fund long term debt (mortgage repayments)

• Trade Unions = increase in company profits should relate to employee wages etc

• Also company safety standards and staff welfare (pension, sick pay etc)


Stakeholders

• Shareholders• Public companies can raise finance on the stock

exchange by issuing shares• Even small business can over to sell shares to a

investor• The idea is that the investor puts up the money

which is then used by the company, if it all goes wrong the investor losses the money – so one can understand why investors/shareholders would like to get a large part of the surplus when things go right (either by dividend – or selling on their shares at a profit or both)


Stakeholders

• Customers • Customers will want value for money• Safety and Professionalism (Health Care

Industry)• Suppliers • Prompt Payment for Services/Goods Supplied• Fair price for product and services• Banks • Cash flow focus on business• Can loans be repaid


Stakeholders

• Revenue Commissioners– A successful company will generate economic activity

(and it is these activities that generate taxes)

• Government– Environmental: emissions/smoking ban

• Hence it is safe to say that there are a lot of competing interests in a business which (depend on the industry) stakeholders will have varying degrees of power.


Agency theory

• Agency relationships occur when one party, the principal, employs another party, the agent, to perform a task on their behalf

• Objectives of principals and agents may not coincide

• Problem of goal congruence


Agency theory

• Often used to explain the relationship of various stakeholders in the organisation

• Managers and the agent of the shareholders

• Employees are the agent for the manager• THE PROBLEM IS THAT THE AGENT

CAN PURSUE THEIR OWN OBJECTIVES (ACT FOR THEIR OWN INTERESTS)


Corporate Governance

• Corporate Governance (mostly aimed at large public companies)

• Aimed at addressing Director and Shareholder Conflict



• Non- Executive Directors (N.E.D)

• A N.E.D are not involved in the running of the company and have no other material business or relationship with the company

• N.E.D are effectively a control check

• At lease half of the board should be N.E.D

• Often provide advice



• Executive Directors

• Chairman and CEO should be separate roles (CEO should not become chairman)

• Chairman should be independent that the time of his/her appointment



• Remuneration Committees– Directors remuneration (including bonus should be

disclosed)– Executive directors remuneration should be

recommended by a Committee of N.E.D

• Nomination Committee– N.E.D selects new NED and executive Directors

• Annual General Meeting (A.G.M)– AGM should contain a Q&A Session for shareholders– Shareholders should be able to vote separately on

each substantial issue


Key ratios


Potential problems

• ROCE– Uses profit, not maximisation of shareholder

wealth

• EPS– Does not represent actual income

• ROE– Sensitive to gearing levels

• Dividend yield– Ignores capital growth


Not for profit organisations


Value for money

• Effectiveness– A measure of outputs– e.g. number of pupils taught

• Efficiency– A measure of outputs over inputs– e.g. Average class size

• Economy– Being effective and efficient at the lowest

possible cost


System analysis

Education

Paul Lydon Notes Acca F9