Financial Management - Elsevier

Financial Management

Examination of the acquisition and deployment of financial resources

Key learning system questions

CS10 16 25

Topics

The finance function The treasury function Financial markets Share price volatility Efficient market hypothesis Investor ratios Working capital management strategies

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The finance function

In a large entity the finance function may be split between treasury and financial control, with both functions reporting to the chief financial officer

Financial control

Preparation of financial reports to stakeholders Preparation and control of budgets Management of pricing policies Preparation of investment appraisals Management of working capital

Financial Management

Balanced scorecard

Emphasises the need to provide information that addresses all relevant areas of performance in an objective and unbiased fashion

Customer satisfaction Enhancement of internal processes Financial Learning and growth

Benchmarking

Used to measure relative performance against finance functions in other entities, or between subsidiary entities

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The treasury function

Financial Management

Treasury is concerned with the relationship between the entity and its financial stakeholders

Main functions

Managing relationships with the banks Ensuring the entity has liquid funds and invests surplus funds Identifying sources of funds and raising capital Managing interest rate risks Dealing in foreign exchange markets Managing foreign exchange risks

In larger entities, treasury will usually be centralised at head office, providing a service to all the various units of the entity and thereby economies of scale

Treasurers require specialist skills to be able to handle effectively e.g.:

An ever-growing range of capital instruments Hedging of foreign exchange risk Advising permissible ways of reducing overall tax liability

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The treasury function

Financial Management

Cost centre or profit centre

Treasury activities may be accounted for simply as a cost centre, but in some entities it is treated as a business in its own right, seeking to make profit out of its activities

Advantages of profit centre

Disadvantages of profit centre

Individual business units of the entity can be charged a market rate for services provided, making their operating costs more realistic Treasurer is motivated to provide services effectively and economically to ensure a profit is made at the market rate e.g. managing hedging activities

Temptation to speculate, increasing exposure to risk Management time is unduly spent in arguments with business units over charges for services Additional administrative costs may be excessive

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Financial markets

Financial Management

Money markets

Capital markets

Markets for trading in relatively short-dated funds, usually less than one year. Dominated by banks and other financial institutions

Encompasses:

Inter-bank and inter-company loans Local authority debt instruments Bills of exchange Certificates of deposit Commercial paper Eurocurrency

Markets for trading in longer-dated securities such as shares and bonds. Examples of capital markets would be the Stock Exchange, the bond market and the Eurobond market

Capital markets have two main functions:

They provide a primary market for raising new capital, usually in the form of equity They also allow trading in existing securities ? the secondary market

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