The PPT About The Financial Decision Making----2

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Lesson1Introductiontoaccountingandfinance.pptx

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MN7029 – Financial Decision Making Week 1.1

Welcome!

Purpose of Module and Learning Objects

Understand and use financial information to make effective business decisions;

Understand key financial management issues, performance indicators and methodologies;

Understand the preparation of and use of accounting;

Assess accounting information to evaluate business performance

Learning Objects

LO1: Critically evaluate company financial performance and make recommendations for improvement;

LO2: Demonstrate an understanding and use of the appropriate analytical techniques to be applied to business case development and investment appraisal; the raising of finance and the distribution of funds to investors;

LO3: Communicate financial information, analysis, issues and recommendations clearly and concisely.

Weblearn

Please make use of Weblearn.

For each session you will see:

Introduction and learning objectives;

Lecture slides;

Additional reading.

You can also share ideas on the Discussion Board

Key Points

Please make sure you are familiar with the module handbook and timetable;

Please watch out for Announcements & Emails

If you have any questions about the course, please consider posting them on the discussion board

If you can’t make a class please let me know beforehand

The group assessment requires you to work in teams. Please be respectful of your teammates time and arrange sessions that work for you all

Any Questions?

Week 1 – Learning Outcomes

Consider the role of the finance function

Compare and contrast the differences between financial accounting and financial management;

Examine how a finance team will support managerial decisions;

Consider your interaction as a manager with the finance function in a business;

Identify and discuss possible objectives for a business;

Introduce the main purpose of corporate governance rules.

What do companies do?

They produce good or services

They use inputs (which need to be paid for) to produce outputs

They need money to pay for inputs (costs) and they receive money (revenue) for their outputs

Paying for inputs or receiving revenue is an economic transaction

Difference between costs and revenue is profit

Managers need to decide what to produce, what price, which supplier, how many workers, contracts, production technique

https://www.bbc.co.uk/news/business-58340082

Financial decision making in the real world – how does a CEO improve share price?

Demonstrating the importance of financial decisions – this manager will have the opportunity to take home a big bonus if he can increase the share price of the company. But how do managers do this? Later we will look at the link between making decisions that increase the wealth of the company in relation to the wealth of the shareholders and therefore share price, but this will involve making pricing/investment decisions

What is accounting?

A process of identifying, recording summarizing and reporting economic information or transactions to decision makers and stakeholders in the form of financial statements

There is a difference between financial accounting and management accounting

The accounting system is the steps performed to analyze, record, quantify and report economic events and their effects on an organization. It must be designed to meet the needs of the users

Insert footer / references if needed

Emphasis on financial management as the ability to take possibly millions of economic transactions in a company and present them in a way that allows interpretation and decision making

The Finance Function

Managers understand, plan, control and make decisions

The finance function helps managers to manage

They do this through managerial activities in the organisation namely

The Finance Function

Strategic management – which requires the setting of long-term objectives and setting out how these objectives will be achieved

Operations management – which requires that things go to plan and putting in place the day to day control of activities in each functional area.

Risk management – which requires the managers to identify the risks faced by the entity and how to manage them.

Figure 1.1 The role of managers

The three management activities can be depicted as shown. The figure shows clearly that they are not distinct and separate.

The Finance Function

To carry out the aforementioned functions requires managers to undertake a number of tasks namely:

Financial Planning

Investment Project Appraisal

Financing Decisions

Capital Market Operations

Financial Control

Financial Planning (Week 1.2)

This requires managers to assess the potential impact of their future investment projects on future financial performance and position using budgeted information to prepare key financial statements for the intended projects.

Investment Project Appraisal (Week 3.1)

Appraising the financial viability of each long term investment projects throws some light on whether or not the project should be undertaken. This will assist the manager to make informed decisions about whether to reject or accept the investment proposal.

Financing Decisions (Week 4.1)

These require managers to decide how projects will be financed. Will they be financed through internally or externally generated funds? What are the costs of each source? Which is most beneficial to the company? These are a few of the questions managers will ask.

Capital Markets Operations (Weeks 4.2)

Companies, especially Public Limited Companies (Plc), raise long term finance through the capital markets which invariably means that managers need to understand how these markets operate.

Financial Control (Week 2.2)

Once managers have taken the decision to implement a plan, they must ensure that things go according to plan. They this by asking subordinates to provide regular reports to them as things get under way. This will enable them to put in place control activities.

The Finance Function Contd.

The five areas looked at above can be depicted in pictorial form in the figure on the next slide. This should hopefully allow you to see the interrelationship of them all and the finance function.

They are all part of the three roles of managers we looked at above – Strategic, Operations and Risk Management.

Figure 1.2 The tasks of the finance function

Financial planning and analysis

Treasury manager

Risk management

Corporate strategy

Who might form part of a finance function?

Financial Controller

Financial accountant

General ledger accountants

Cash book

REPORTING/HISTORICAL

FORECASTING/FUTURE

CFO

CFO is known as Csuite – part of the Board of Directors,

Financial controller – oversees the accounts reporting team, responsible for budgets, analysis

Ginance/accounts manager – day to day running of the finance requirements

May also have general ledger accounts responsible for specific areas e.g. cash book

Strategic finance function:

FP&A:

What is the objective of a company?

Question for the class – can they come up with ideas about what a company’s objective or goal should be? Leading into the theories of Friedman and Freeman about only objective to be to maximise wealth or take account of stakeholder interests

The structure of a company

Company X

Management

Employees

Banks

Customers

Suppliers

General Public

Shareholders

For students to help emphasis the relationships:

Company is a separate legal entity – it can contract in its own right and has its own transactions. A company is not its employees or managers – they have a contractual relationship with the company to perform duties or services

Shareholders are owners of the company – this might include some members of the management team but they can wear different hats whether they are acting as owner or manager – possibly conflicts of interest

Other people are stakeholders- they have an interest – it might be contractual e.g. a bank or more nebulous – how does your company affect the general public

Milton Friedman’s Shareholder Theory

The management team are responsible for the business. They are employees of the owner of the business. The management’s prime responsibility is to the owners.

The goal of the owners (shareholders) is “to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom”

Therefore, the objective of the business is to use the resources of the company to increase or maximize the wealth of the shareholders.

If the managers account do not use the resources to maximize the wealth of the shareholders they will invest their money elsewhere.

How do we maximize value? By making economic decisions within the business that maximize the value of the business.

Primary objective

To achieve wealth maximisation the needs of other stakeholders must be considered

Not the same as profit maximisation

The primary objective of a business is shareholder wealth maximisation:

High ethical standards may be needed to maximise shareholder wealth

Shareholder wealth maximisation

Shareholders:

Have a residual claim and bear the risk

Are incentivised to increase their residual claim through entrepreneurial activity

Are the effective owners

However, pursuit of this objective:

May undermine the status of other stakeholders

May encourage excessive cost cutting

May encourage unethical behaviour

Profit maximisation problems

Profit cannot be objectively determined

Profit takes no account of risk

Profit is an imprecise term

Period over which profit should be maximised is unclear

Profit takes no account of opportunity cost

Video – R Edward Freeman on Stakeholder Theory

https://www.youtube.com/watch?v=bIRUaLcvPe8

Does not offer clear-cut objectives

Increases problems of accountability

Raises difficult questions concerning who the stakeholders are and how they should be treated

Stakeholder approach – problems

Case study

Consider this article about the profits drug companies expect to make from the COVID vaccine (https://www.bbc.co.uk/news/business-55170756)

AstraZeneca has promised not to make a profit until the pandemic is over

Each group takes on the role of a stakeholder in AstraZeneca (shareholder, manager, government) spend 10 minutes discussing your view on the decision

One person report back to the group

If time get the groups to discuss and report back or can do as a class discussion

The agency problem

In a company the owners (shareholders) are not the management (directors).

Directors are agents of the shareholders.

How can we protect shareholders if there is a difference of interests?

Align interests/link reward

Rules (UK governance code)

Increasing shareholder involvement

Figure 1.4 Principles underpinning a framework of rules

Rules are set by individual jurisdictions, but generally will be underpinned by these principles

Disclosure of relevant information to parties who need to understand it

Fairness across different businesses (i.e. not unnecessary rules)

A mechanism to hold those responsible as accountable for their actions

The UK Corporate Governance Code

Aims to ensure that:

Powers and responsibilities of directors are clearly delineated

Appropriate checks and balances are in place

Source: Based on information in The UK Corporate Governance Code, July 2018, Financial reporting Council. www.frc.org.uk

Covers five main areas

Board leadership and company purpose

Division of responsibilities

Audit, risk and internal control

Composition succession and evaluation

Remuneration

The UK Corporate Governance Code

Source: Based on information in The UK Corporate Governance Code, July 2018, Financial reporting Council. www.frc.org.uk

Figure 1.5 Ownership of UK listed shares, end of 2016

Source: Ownership of UK Quoted Shares 2016, Table 4, Office for National Statistics, 29 November 2017. Office for National Statistics licensed under the Open Government Licence v3.0.

Exerting control over directors

Two main approaches available to shareholders:

Linking directors remuneration to share performance

Monitoring directors actions and controlling their use of business resources

Figure 1.6 The main forms of shareholder activism

UK Stewardship Code

establishing policies relating to stewardship and voting procedures, along with their periodic reporting

checking on investee businesses

deciding when stewardship activities should be intensified and when to act in concert with other shareholders

disclosing conflicts of interest arising from stewardship activities and how they are resolved

The PPT About The Financial Decision Making----2

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