Paul Lydon Notes Acca F9


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Lecturer: Paul Lydon

ACCA F9: Financial Management

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Paul Lydon Notes Acca F9

  1. 1. ACCA Paper F9 Financial Management Paul Lydon F9 Lecture 1
  2. 2. Core areas of the syllabus <ul><li>Financial management function </li></ul><ul><li>Financial management environment </li></ul><ul><li>Working capital management </li></ul><ul><li>Investment appraisal </li></ul><ul><li>Business finance </li></ul><ul><li>Cost of capital </li></ul><ul><li>Business valuations </li></ul><ul><li>Risk management </li></ul>Paul Lydon F9 Lecture 1
  3. 3. Format of the exam <ul><li>Four compulsory questions </li></ul><ul><li>25 marks each </li></ul><ul><li>Balance of calculative and discursive elements in questions </li></ul>Paul Lydon F9 Lecture 1
  4. 4. AN OUTLINE OF FINANCIAL MAMAGEMENT <ul><li>Financial = Money, Cash etc </li></ul><ul><li>Management: </li></ul><ul><ul><li>Plan – Objectives (Corporate – Business – Operational) </li></ul></ul><ul><ul><li>Establish Alternatives for each objective </li></ul></ul><ul><ul><li>Evaluate Alternatives then choose one </li></ul></ul><ul><ul><li>Control: ensure that actual outcomes are inline with expected out-comes </li></ul></ul><ul><ul><li>Take control action if necessary </li></ul></ul>Paul Lydon F9 Lecture 1
  5. 5. Financial Management compared with Management Accounting and Financial Accounting <ul><li>Financial Accounting: </li></ul><ul><ul><li>Profit and Loss for previous Period </li></ul></ul><ul><ul><li>Annual Accounts for audit etc </li></ul></ul><ul><li>Management Accounting </li></ul><ul><ul><li>Short term control information (Compare budget with actual) </li></ul></ul><ul><ul><li>Costing information; Marginal/Absorption </li></ul></ul><ul><ul><li>Relevant Costing etc </li></ul></ul><ul><li>Financial Management </li></ul><ul><ul><li>Long Term Finance issues (such as bank loans and leasing) </li></ul></ul><ul><ul><li>Investment Decisions (buy a new business – expand the business) </li></ul></ul>Paul Lydon F9 Lecture 1
  6. 6. The financial management function <ul><li>(1) Raising finance </li></ul><ul><li>(2) Investing funds raised – this includes </li></ul><ul><ul><ul><li>allocating funds and </li></ul></ul></ul><ul><ul><ul><li>controlling investments </li></ul></ul></ul><ul><li>(3) Dividend policy – returning gains to shareholders </li></ul>Paul Lydon F9 Lecture 1
  7. 7. Corporate strategy and objectives Paul Lydon F9 Lecture 1
  8. 8. Corporate stakeholders Paul Lydon F9 Lecture 1
  9. 9. Stakeholders <ul><li>A stakeholder is any party which has a vested interest in the company such as: </li></ul><ul><li>Shareholders </li></ul><ul><ul><li>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 </li></ul></ul>Paul Lydon F9 Lecture 1
  10. 10. Stakeholders <ul><li>Shareholder wealth Maximisation </li></ul><ul><li>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 </li></ul>Paul Lydon F9 Lecture 1
  11. 11. Stakeholders <ul><li>The Community at large </li></ul><ul><li>Especially relates to Public Sector Enterprises (E.G Hospitals) </li></ul><ul><li>Consider the impact on swords if the airport was to relocate to south Dublin </li></ul><ul><li>Employees spending their wages in the area etc </li></ul>Paul Lydon F9 Lecture 1
  12. 12. Stakeholders <ul><li>Management </li></ul><ul><li>Management and senior staff will have their own objectives which may not be in line with other stakeholders: </li></ul><ul><li>Increase short-term profits for a bonus </li></ul><ul><li>Resist Change (Privatisation/Modernisation) </li></ul>Paul Lydon F9 Lecture 1
  13. 13. Stakeholders <ul><li>Employees </li></ul><ul><li>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) </li></ul><ul><li>Trade Unions = increase in company profits should relate to employee wages etc </li></ul><ul><li>Also company safety standards and staff welfare (pension, sick pay etc) </li></ul>Paul Lydon F9 Lecture 1
  14. 14. Stakeholders <ul><li>Shareholders </li></ul><ul><li>Public companies can raise finance on the stock exchange by issuing shares </li></ul><ul><li>Even small business can over to sell shares to a investor </li></ul><ul><li>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) </li></ul>Paul Lydon F9 Lecture 1
  15. 15. Stakeholders <ul><li>Customers </li></ul><ul><li>Customers will want value for money </li></ul><ul><li>Safety and Professionalism (Health Care Industry) </li></ul><ul><li>Suppliers </li></ul><ul><li>Prompt Payment for Services/Goods Supplied </li></ul><ul><li>Fair price for product and services </li></ul><ul><li>Banks </li></ul><ul><li>Cash flow focus on business </li></ul><ul><li>Can loans be repaid </li></ul>Paul Lydon F9 Lecture 1
  16. 16. Stakeholders <ul><li>Revenue Commissioners </li></ul><ul><ul><li>A successful company will generate economic activity (and it is these activities that generate taxes) </li></ul></ul><ul><li>Government </li></ul><ul><ul><li>Environmental: emissions/smoking ban </li></ul></ul><ul><li>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. </li></ul>Paul Lydon F9 Lecture 1
  17. 17. Agency theory <ul><li>Agency relationships occur when one party, the principal , employs another party, the agent , to perform a task on their behalf </li></ul><ul><li>Objectives of principals and agents may not coincide </li></ul><ul><li>Problem of goal congruence </li></ul>Paul Lydon F9 Lecture 1
  18. 18. Agency theory <ul><li>Often used to explain the relationship of various stakeholders in the organisation </li></ul><ul><li>Managers and the agent of the shareholders </li></ul><ul><li>Employees are the agent for the manager </li></ul><ul><li>THE PROBLEM IS THAT THE AGENT CAN PURSUE THEIR OWN OBJECTIVES (ACT FOR THEIR OWN INTERESTS) </li></ul>Paul Lydon F9 Lecture 1
  19. 19. Corporate Governance <ul><li>Corporate Governance (mostly aimed at large public companies) </li></ul><ul><li>Aimed at addressing Director and Shareholder Conflict </li></ul>Paul Lydon F9 Lecture 1
  20. 20. Corporate Governance <ul><li>Non- Executive Directors (N.E.D) </li></ul><ul><li>A N.E.D are not involved in the running of the company and have no other material business or relationship with the company </li></ul><ul><li>N.E.D are effectively a control check </li></ul><ul><li>At lease half of the board should be N.E.D </li></ul><ul><li>Often provide advice </li></ul>Paul Lydon F9 Lecture 1
  21. 21. Corporate Governance <ul><li>Executive Directors </li></ul><ul><li>Chairman and CEO should be separate roles (CEO should not become chairman) </li></ul><ul><li>Chairman should be independent that the time of his/her appointment </li></ul>Paul Lydon F9 Lecture 1
  22. 22. Corporate Governance <ul><li>Remuneration Committees </li></ul><ul><ul><li>Directors remuneration (including bonus should be disclosed) </li></ul></ul><ul><ul><li>Executive directors remuneration should be recommended by a Committee of N.E.D </li></ul></ul><ul><li>Nomination Committee </li></ul><ul><ul><li>N.E.D selects new NED and executive Directors </li></ul></ul><ul><li>Annual General Meeting (A.G.M) </li></ul><ul><ul><li>AGM should contain a Q&A Session for shareholders </li></ul></ul><ul><ul><li>Shareholders should be able to vote separately on each substantial issue </li></ul></ul>Paul Lydon F9 Lecture 1
  23. 23. Key ratios Paul Lydon F9 Lecture 1
  24. 24. Potential problems <ul><li>ROCE </li></ul><ul><ul><li>Uses profit, not maximisation of shareholder wealth </li></ul></ul><ul><li>EPS </li></ul><ul><ul><li>Does not represent actual income </li></ul></ul><ul><li>ROE </li></ul><ul><ul><li>Sensitive to gearing levels </li></ul></ul><ul><li>Dividend yield </li></ul><ul><ul><li>Ignores capital growth </li></ul></ul>Paul Lydon F9 Lecture 1
  25. 25. Not for profit organisations Paul Lydon F9 Lecture 1
  26. 26. Value for money <ul><li>Effectiveness </li></ul><ul><ul><li>A measure of outputs </li></ul></ul><ul><ul><li>e.g. number of pupils taught </li></ul></ul><ul><li>Efficiency </li></ul><ul><ul><li>A measure of outputs over inputs </li></ul></ul><ul><ul><li>e.g. Average class size </li></ul></ul><ul><li>Economy </li></ul><ul><ul><li>Being effective and efficient at the lowest possible cost </li></ul></ul>Paul Lydon F9 Lecture 1
  27. 27. System analysis Paul Lydon F9 Lecture 1