Saturday, 4 December 2021
Financial management
Important for:
- Business planning and control
- Allocation of resources among competing uses
- Personal performance assessment
- Corporate governance issues
Role of the finance function:
Generation of financial information:
- Reporting and analysis
Decision making:
- Business planning
- Investment project appraisal
- Financing decisions
- Capital market operations
- Financial control
Financial accounting VS management accounting
Financial accounting - recording, analysing and reporting
- Compliance with statutory requirements and professional standards
- Management accounting - using financial information for business decision
making
Other things that differ between them:
•Nature of reports produced
•Level of detail
•Regulations
•Reporting interval
1
, Saturday, 4 December 2021
•Time horizon
•Range and quality of information
EVOLUTION OF FINANCIAL MANAGEMENT
•Offshoot of accounting – initially largely descriptive –lacked a theoretical
framework.
•Influence of economic theories – now increasingly seen as a branch of applied
economics – economics of time and risk –capital markets.
•Module approach: Economic optimisation approach – business as an optimising
entity.
•Other approaches – e.g., behavioural approaches
4 Finance functions:
1. Analysis
2. Cost-Volume-Profitability Analysis
3. Investment Appraisal
4. Sources of finance and the capital structure decision
OBJECTIVES OF A BUSINESS
•Shareholder wealth maximisation – a key idea underpinning conventional
approaches to financial management.
•Wealth maximisation or profit maximisation – potential conflicts.
•Wealth maximisation and ethics.
•Maximisation versus “satisficing” – different stakeholders in a business.
•Modern large businesses - divide between ownership and management –
emergence of the “technocracy”- implications for business objectives.
2
Financial management
Important for:
- Business planning and control
- Allocation of resources among competing uses
- Personal performance assessment
- Corporate governance issues
Role of the finance function:
Generation of financial information:
- Reporting and analysis
Decision making:
- Business planning
- Investment project appraisal
- Financing decisions
- Capital market operations
- Financial control
Financial accounting VS management accounting
Financial accounting - recording, analysing and reporting
- Compliance with statutory requirements and professional standards
- Management accounting - using financial information for business decision
making
Other things that differ between them:
•Nature of reports produced
•Level of detail
•Regulations
•Reporting interval
1
, Saturday, 4 December 2021
•Time horizon
•Range and quality of information
EVOLUTION OF FINANCIAL MANAGEMENT
•Offshoot of accounting – initially largely descriptive –lacked a theoretical
framework.
•Influence of economic theories – now increasingly seen as a branch of applied
economics – economics of time and risk –capital markets.
•Module approach: Economic optimisation approach – business as an optimising
entity.
•Other approaches – e.g., behavioural approaches
4 Finance functions:
1. Analysis
2. Cost-Volume-Profitability Analysis
3. Investment Appraisal
4. Sources of finance and the capital structure decision
OBJECTIVES OF A BUSINESS
•Shareholder wealth maximisation – a key idea underpinning conventional
approaches to financial management.
•Wealth maximisation or profit maximisation – potential conflicts.
•Wealth maximisation and ethics.
•Maximisation versus “satisficing” – different stakeholders in a business.
•Modern large businesses - divide between ownership and management –
emergence of the “technocracy”- implications for business objectives.
2
