Financial Management 2A INTRODUCTION Chapter 1 Role of Financial manager L Roulstone Varsity College 1 introduction House Rules Respect Participation L Roulstone Varsity College Pre-reading and post-reading 2 L Roulstone Varsity College 3 resources Textbook – Financial Management 2A 2022 edition VC Learn – ICE tasks, past papers, extra activities and further reading Module Outline – Outcomes and pacer L Roulstone Varsity College 4 Purp ose of module To apply your knowledge of accounting principles and concepts to make informed financial decisions within the business environment. This includes the interpretation of financial information that enables sound financial and investment decisions. L Roulstone Varsity College 5 introduction Throughout this module, you will be acting as the Financial Manager. All departments interact with the finance department - Day-to-day operations - Enough money to meet key objectives Finance department, led by the financial manager, will interact with all departments when planning, managing and allocating business funds. - Initiate, consider and manage areas of financing on behalf of the business L Roulstone Varsity College Finance department is the backbone of any business. Without it, other areas of the business will not be able to operate and the business’s key objectives would not be achieved. 6 explain the term profit maximisation Image 1 L Roulstone Varsity College 7 explain the term profit maximisation Maximising the bottom line = profit for the year Measured in Earnings Per Share = EPS (net profit per share) EPS does NOT take into account •Timing of cash flows e.g. credit sales •Risks to the business e.g. investment that might lead to future costs L Roulstone Varsity College 8 Identify the distinction between profit maximisation and share wealth maximisation Shareholder wealth max. Measured with ref. to the current share price – listed on the JSE. Considers the timing and size cash flows. Takes into account risks to the business. All financial decisions have a direct impact on the share price financial manager must only make decisions that will have a positive affect on the share price. L Roulstone Varsity College 9 Identify the distinction between profit maximisation and share wealth maximisation Decision 1 Decision 2 The company will increase their mark-up from 50% to 55%. The company participates in a community outreach programme. Which decision will increase shareholder wealth? L Roulstone Varsity College 10 list the drawbacks of profit maximisation • Accounting profits do not always materialise into cash flows • Ignores the time value of money (value of income now ≠ value of cash received later • Accounting profits can be subject to creative accounting (manipulation) • Risk factors are not taken into account (high profits = high risk) • Focus on earning short-term returns at the expense of long-term development L Roulstone Varsity College 11 Food for thought Should companies prioritize shareholder maximization over the well-being of other stakeholders, such as employees, customers, and the environment? L Roulstone Varsity College 12 t2Lo4 Discuss the primary responsibilities of a financial manager Primary focus = the acquisition, financing and management of assets to ensure their optimal utilisation in order to maximise the wealth of shareholders. ICE Task 1 Primary responsibilities Financial planning and analysis (Forecasting and budgets, coordination and control) Investment decisions – short, medium or long (Key decisions) Financing decisions (Financial negotiation) Discuss the various responsibilities of a financial manager Page 4 – 10 Other responsibilities Cash management Relationship management (Financial markets and other stakeholders) Dividend decisions L Roulstone Varsity College Risk management (Strategic, operational, financial, information and compliance) 13 Explain the importance of financial forecasts and budgets for a financial manager and the organisation Provides an indication of what the business’s capital or funding requirements will be in the immediate and long term. Enable FM to: Assess Compare benchmarks to actual performance - Available funds and future requirements Evaluate the performance of departmental managers - Key areas that influences sales and profit growth - Financial risk and expectation about financial growth - Capital investment requirements (new assets) - Future commitments and resource demands L Roulstone Varsity College 14 Explain the importance of financial forecasts and budgets for a financial manager and the organisation Financial forecast FM will use historical financial information to predict what will happen in the next few months Prepared 3 times a year and concern the financial expectations of the current year Budget Financial plan of the financial year immediately following the current year Predicts expected cash flows of that year Prepared annually in the last quarter of the year L Roulstone Varsity College 15 L Roulstone Varsity College 16 List reasons why stakeholders are interested in an organization’s financial information • Shareholders = return on investment – dividends/capital appreciation • Creditors = use financial statements to determine creditworthiness of business • Employees = assess whether their jobs are secure • Government = determine whether taxes might be payable • Customers = assess ability to continue its existence and maintain stability of operations • Community = assess how the organisation will contribute to the local economy L Roulstone Varsity College 17 List reasons why stakeholders are interested in an organization’s financial information Rearrange the list of stakeholders in order of importance to a business. L Roulstone Varsity College 18 List reasons why stakeholders are interested in an organization’s financial information It's important for businesses to understand and consider the interests of all their stakeholders in their decision-making processes. Balancing the interests of various stakeholders is critical for building strong, ethical, and profitable businesses. L Roulstone Varsity College 19 Explain the term dividend A company can raise funds by issuing shares to investors. In return for investing money, investors are rewarded dividends (reward derived from profit). Retained income = portion of profits that have not been distributed as dividends. L Roulstone Varsity College 20 Discuss the dangers of paying a high dividend to shareholders FM must decide how much profit must be retained and how much should be distributed to shareholders. Cash flow - Size of cash outflow Retained profit management - Profits reinvested to provide future growth Investor relations - Small dividends might deter investors L Roulstone Varsity College 21 Discuss the dangers of paying a high dividend to shareholders What are some reasons why a high dividend pay out is dangerous? -Less capital for future growth -Less capital for unexpected events -Attract the wrong type of investors L Roulstone Varsity College 22 Explain the benefits of high ethical standards in an organisation The business owners (shareholders/investors) must trust the financial manager to always follow ethical considerations when handling finance. FM comply with ethical code of a professional body (E.g. IPFM) Benefits - Stronger reputation of the business - Strengthens relationship with stakeholders L Roulstone Varsity College 23 Explain the benefits of high ethical standards in an organisation FM should consider what impact their decisions have on - SH rights - Mutual SH wealth maximisation (one SH is not favoured) - Relationship with SH and other stakeholders Example of an unethical financial manager L Roulstone Varsity College 24 Discuss when the ‘agency problem’ arises in an organisation Relationship between managers and shareholders, whereby the shareholders have delegated the authority to manage the business to the managers. FM are appointed by SH and given the authority to make decisions that will ensure: - Growth of the business - Maximisation of SH value L Roulstone Varsity College 25 Discuss when the ‘agency problem’ arises in an organisation RISK – FM will not act in the best interest of the SH agency problem arises when the objectives of the FM are not aligned with that of the business. E.g. FM makes decisions that benefit their personal wealth, job security and employment incentives at the expense of the business OR overlook good investment decisions if not qualified or experienced https://www.youtube.com/watch?v=jCr23nUT6v8 L Roulstone Varsity College 26 Ethical or unethical A financial manager purchases shares in a company just before it is about to announce a positive earnings report, and then sells the shares at a profit after the announcement. The financial manager knew about the positive earnings report before it was made public. L Roulstone Varsity College 27 Ethical or unethical A financial manager invests company funds in a company that they own or have a personal financial interest in. This creates a conflict of interest, as the financial manager may prioritize their own financial gain over the best interests of the company. L Roulstone Varsity College 28 Ethical or unethical A financial manager identifies significant financial risks associated with a company that their employer is considering acquiring. The financial manager presents their findings and analysis to the company's management team, who decide not to pursue the acquisition based on the financial manager's recommendations. L Roulstone Varsity College 29 Discuss the advantages and disadvantages of performancerelated reward schemes = Incentive to make sure FM remains responsible for taking on business risks e.g. salary increases or performance bonuses Advantages • • • • • Disadvantages Attract qualified and competent personnel FM motivated Willingness to take on challenging tasks increased Save money through efficient administration Goals are obtained through commitment https://www.youtube.com/watch?v=PYJ22-YYNW8 • • • • L Roulstone Varsity College Unrewarded tasks may be neglected Low reward employees demotivated Unhealthy competition Costly 30 Kahoot! https://create.kahoot.it/share/fima-ch1/68650459-96e6-4d78-ac97-a6cd8594612c L Roulstone Varsity College 31 Activities Chapter 1 Question 1.1 – 1.6 (1.5 is a calculation question – attempt as best you can) See solutions Question Bank Question 1a – 1g See solutions See relevant past paper questions L Roulstone Varsity College 32 ICE ICE Task 1 Discuss the various responsibilities of a financial manager Page 4 – 10 Word document/handwritten L Roulstone Varsity College 33 references Freeman, A, Maritz, CJ, Shina L & Wheeler B 2022 Financial Management 2A (Diploma) 5th edition, 1st impression Cape Town: EDGE Learning Media (PM1) ISBN: 978-1-77612-446-6 (Hardcover) Image 1 https://www.google.com/search?q=profit+maximisation+cartoon+joke&tbm=isch&ved=2ahUKEwi2hZjEgaH9AhVgpycCHX6bBEg Q2cCegQIABAA&oq=profit+maximisation+cartoon+joke&gs_lcp=CgNpbWcQA1COB1jWC2CMDWgAcAB4AIABwQKIAcsJkgEFMi0yLjKY AQCgAQGqAQtnd3Mtd2l6LWltZ8ABAQ&sclient=img&ei=88jxY_a_IODOnsEP_raSwAQ&bih=714&biw=1536&rlz=1C1YTUH_enZA10 35ZA1035#imgrc=KakFYfKRhQxaVM L Roulstone Varsity College 34
