ACCA Paper F9 Mnemonics Revision (Sample Download)

Paper F9: Financial Management
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Mnemonics: 160
Charts and Diagrams: 122
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Type of Title Topic covered (briefly) Screen
presentation number
Chart What is corporate finance? Financial management function 42
Chart 3 main financial decisions Financial management function 43
Chart Capital structure Financial management function 44
Chart The financial management function Financial management function 45
Chart Finance function within a large Financial management function 46
company/group
Mnemonic The role of the Financial Controller Financial management function 47
Mnemonic The role of the Treasurer Financial management function 48
Chart The scope of financial management Financial management function 49
+ AddVance activities - introduction
Chart The scope of financial management Financial management function 50

activities - overview
Chart Cash flows between the firm and the Financial management function 51
financial markets
Chart The scope of financial management - Financial management function 52
recap
Chart The financial management planning Financial management function 53
process
Mnemonic The financial management process Financial management function 54
Chart The financial management planning Financial management function 55
process - overview
Chart A firm’s liquidity cycle Financial management function 56
Mnemonic Benefits of centralised treasury Financial management function 57
management
Mnemonic Disadvantages of centralised treasury Financial management function 58
management
Chart/mnemonic The principal financial objectives Financial objectives 59
Chart Stakeholder analysis for a typical Financial objectives 60
company
Mnemonic Concept of ‘Principal-agency Theory’ Financial objectives 61
(PAT) applied to shareholders and
directors
Mnemonic Difficulties associated with managing Financial objectives 62
organisations with multiple objectives
Mnemonic Reasons why maximising shareholders’ Financial objectives 63
profits is not the same as maximising
shareholders’ wealth
Mnemonic The main Corporate Governance Financial objectives 64
proposals
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Mnemonic Main focus of the LSE’s ‘Combined Code Financial objectives 65
of Corporate Governance’
Mnemonic The distinctive characteristics of public Financial objectives 66
services in the context of corporate
governance
Mnemonic Remuneration schemes for managers Financial objectives 67
Chart Value for Money (VFM) Objectives in not-for-profit 68
organisations
Chart Measuring performance in a not-for-profit Objectives in not-for-profit 69
organisation organisations
Chart Financial performance analysis - overview Financial ratio analysis 70
Chart Financial performance analysis – Financial ratio analysis 71
categories of ratios
Chart The RONA Pyramid Financial ratio analysis 72
Mnemonic Implications/issues of the ROI measure Financial ratio analysis 73
Chart Measuring financial performance - Financial ratio analysis 74
overview
Mnemonic The FIVE main groupings for financial Financial ratio analysis 75
performance analysis
Mnemonic The implications for the growth measures Financial ratio analysis 76
used by financial managers
Mnemonic Reasons/benefits of financial ratio Financial ratio analysis 77
analysis
Mnemonic Limitations of ratio analysis Financial ratio analysis 78
Mnemonic Information required for meaningful ratio Financial ratio analysis 79
analysis
Chart Combined analysis (Collection period) Financial ratio analysis 80
Chart Overtrading Financial ratio analysis 81
Mnemonic Characteristics of overtrading Financial ratio analysis 82
Mnemonic Ratios/measures that can be used to Financial ratio analysis 83
indicate overtrading
Mnemonic Parties who need to analyse corporate Financial ratio analysis 84
financial figures in addition to
management
Mnemonic Reasons why comparisons should be Financial ratio analysis 85
based on companies in the same industry
or market sector
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Mnemonic The difficulties involved in inter-firm Financial ratio analysis 86
comparison
Mnemonic Macroeconomics Financial management 87
environment
Chart The economic goals of government Financial management 88
environment
Mnemonic Main economic goals of most Financial management 89
governments environment
Chart Main sources of inflation Financial management 90
environment
Mnemonic Sources of inflation Financial management 91
environment
Mnemonic Government policy : Full employment Financial management 92
environment
Mnemonic Examples of potential conflict within Financial management 93
government economic policies environment
Chart The Bank of England’s (Central Bank) Financial management 94
‘Repo’ rate of interest environment
Chart Economic objectives of Government Financial management 95
environment
Chart Fiscal policies of central government Financial management 96
environment
Mnemonic Gilts Financial management 97
environment
Mnemonic The effects of a high PSBR (Public Sector Financial management 98
Borrowing Requirement) on private sector environment
businesses
Mnemonic Factors that regulate the size of the ‘Bank Financial management 99
reserve requirement’ environment
Mnemonic Characteristics of the ‘perfectly Financial management 100
competitive market’ environment
Mnemonic Basis of monopoly power Financial management 101
environment
Mnemonic The effect of ‘green policies’ on Financial management 102
companies environment
Mnemonic Ways that inflation can affect a company Financial management 103
environment
Mnemonic The central role of working capital Working capital management 104
management in financial management
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Mnemonic Potential conflict between functional Working capital management 105
managers and financial managers in
working capital decisions
Chart Example of the need for working capital Working capital management 106
investment
Chart Working capital investment has a cost but Working capital management 107
there is no direct money return
Chart The constituents of ‘Working capital Working capital management 108
management’
Mnemonic Sources of information available to help Working capital management 109
credit assessment
Mnemonic Reasons for delays in invoicing Working capital management 110
Mnemonic Possible actions for dealing with slow Working capital management 111
payers
Mnemonic Debtor management – general factors Working capital management 112
Mnemonic Steps that a company could use to reduce Working capital management 113
bad debts
Chart Derivation of formula for calculating the Working capital management 114
average ‘Accounts payable’ balance
Chart Offering discounts for early payment Working capital management 115
Chart Receiving payments from overseas sales Working capital management 116
Mnemonic Managing payments from overseas Working capital management 117

customers
Mnemonic The workings of an effective credit control Working capital management 118
department
Chart Factoring book debts Working capital management 119
Chart Factoring book debts: Ups and Downs Working capital management 120
Mnemonic Benefits of factoring debts Working capital management 121
Chart Overview on the management of accounts Working capital management 122
receivable
Chart Overview on the management of accounts Working capital management 123
receivable - 2
Mnemonic How risks of foreign trade (excluding Working capital management 124
foreign exchange risks) might be
managed
Mnemonic Terms of trade for overseas customers Working capital management 125
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Chart Three main types of trade credit Working capital management 126
Chart Control of trade credit Working capital management 127
Chart Taking discount for early payment Working capital management 128
Mnemonic Advantages of using trade credit to Working capital management 129
finance working capital
Mnemonic Factors that influence the amount of Working capital management 130
trade-credit period taken
Chart Levels of inventory Working capital management 131
Mnemonic The costs of holding inventory (stock) Working capital management 132
Mnemonic Costs of acquiring inventory (purchase Working capital management 133
order costs)
Mnemonic Benefits of holding high levels of inventory Working capital management 134
(stock)
Mnemonic Disadvantages of holding high levels of Working capital management 135
inventory (stocks)
Mnemonic Ways a manufacturing company can use Working capital management 136
to reduce its average raw material
inventory
Chart Characteristics of JIT systems Working capital management 137
Mnemonic The nature and characteristics of supply Working capital management 138
in JIT
Mnemonic JIT. What is planned to be available just Working capital management 139
in time?
Mnemonic Aims of Just-In-Time (JIT) Working capital management 140
Mnemonic Pre-requisites for a successful JIT system Working capital management 141
Mnemonic Advantages associated with JIT systems Working capital management 142
Mnemonic Toyota Production System (TPS) Working capital management 143
Mnemonic Examples of waste (non-value-adding Working capital management 144
activity and costs)
Chart The concept of ‘pull production’ linked to Working capital management 145
‘just in time (JIT)’
Chart Cash management Working capital management 146
Chart Calculation of ‘Cash conversion cycle Working capital management 147
period’
Mnemonic Releasing cash from working capital to Working capital management 148
deal with short-term cash deficits
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Mnemonic Reasons for a company to hold liquid Working capital management 149
assets
Chart 6 Steps for cash budgeting Working capital management 150
Chart Cash budgeting: Receipts and payments Working capital management 151
model
Chart Cash flow statement Working capital management 152
Chart Baumol Cash Budget Model Working capital management 153
Mnemonic Potential problems associated with the Working capital management 154
Baumol model
Chart Miller-Orr Cash Budget Model Working capital management 155

Chart Management of short-term surplus cash Working capital management 156
Mnemonic Factors to consider before investing Working capital management 157
surplus short-term funds on the money
market
Chart Management of short-term deficit cash Working capital management 158
Mnemonic Reasons why there are cash problems Working capital management 159
(cash deficits)
Mnemonic Overcoming short-term deficit cash Working capital management 160
Chart Dynamics between short- and long-term Working capital management 161
interest rates
Chart Market segmentation theory Working capital management 162
Mnemonic 3 reasons why under normal economic Working capital management 163
conditions short-term interest rates are
lower than long-term rates.
Chart Financing working capital: Three Working capital management 164
approaches
Chart Financing working capital Working capital management 165
Mnemonic 3 different financing policies for working Working capital management 166
capital
Mnemonic The factors to consider before adopting Working capital management 167
an ‘aggressive financing policy’
Mnemonic Balance between cash and short-term Working capital management 168
investments
Mnemonic Explanations for the shape of the ‘Normal Working capital management 169
Interest Yield Curve’
Chart Financial instruments (‘paper’) in the Working capital management 170
money markets
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Mnemonic Financial instruments used in the money Nature and role of financial 171
market markets and institutions
Chart The Bill of Exchange mechanism Nature and role of financial 172
markets and institutions
Chart Letter of Credit Nature and role of financial 173
Mnemonic The main organisations acting as financial Nature and role of financial 174
intermediaries markets and institutions
Mnemonic The main functions (roles) served by Nature and role of financial 175
financial intermediaries in the market markets and institutions
Chart Organisations operating as financial Nature and role of financial 176
intermediaries markets and institutions
Chart The role of financial intermediaries - 1 Nature and role of financial 177
Mnemonic Ways that investors benefit from financial Nature and role of financial 182
intermediation markets and institutions
Chart The financial markets Nature and role of financial 183
Chart Money Nature and role of financial 184
Chart The role of the Central Bank in the money Nature and role of financial 185
market markets and institutions
Chart The London Stock Exchange (LSE) - 1 Nature and role of financial 186
Chart Risk/return trade-off - 1 Nature and role of financial 189

Chart Risk/return trade-off - 2 Nature and role of financial 190
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Mnemonic Types of risks concerning financial and Nature and role of financial 191
investment decisions markets and institutions
Mnemonic Key factors in choosing sources of Business finance 192
finance
Mnemonic The relative merits of short-term debt Business finance 193
compared with long-term debt
Mnemonic The problems of using short-term debt Business finance 193
sources compared with long-term debt
Mnemonic Sources of short-term finance Business finance 194

Mnemonic Bank investigation concerning a loan Business finance 195
application
Mnemonic Danger signs for a bank when assessing Business finance 196
a bank loan application
Mnemonic Factors that influence the rate of interest Business finance 197
charged on a new bank loan
Mnemonic The ‘Sale and lease-back’ decision Business finance 198
Chart Public equity company raising long-term Business finance 199
finance
Chart Ordinary shares and their characteristics - Business finance 200
1
Chart Ordinary shares and their characteristics - Business finance 201
2
Chart Ordinary shares and other things to know Business finance 202
-1
-2
-3
-4
Mnemonic Factors affecting a share price Business finance 206
Mnemonic Retained earnings compared with a new Business finance 207
issue of equity
Mnemonic Factors relating to a public issue of equity Business finance 208
Chart Rights issue - overview Business finance 209

Chart Rights issue - 1 Business finance 210
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Mnemonic Contents of a Prospectus for a Rights Business finance 213
issue
Mnemonic Benefits of a rights issue in a bull market Business finance 214
Mnemonic The drawbacks of a rights issue Business finance 215
Chart Initial Public Offering (IPO) - 1 Business finance 216
Mnemonic Advantages of getting listed on a stock Business finance 219
exchange
Mnemonic Disadvantages of getting listed on a stock Business finance 220
exchange
Mnemonic Methods for a company to obtain a listing Business finance 221
on a stock exchange
Mnemonic Costs of an issue on the stock exchange Business finance 222
Mnemonic Ways investors use to assess a company Business finance 223
that is making an initial public offer (IPO)
Mnemonic Ways an unquoted company might Business finance 224
restructure its balance sheet prior to the
initial offer (IPO)
Mnemonic Dividend policy – the practical Business finance 225
considerations
Chart The dividend decision - 1 Business finance 226
Mnemonic Different dividend policies Business finance 231
Mnemonic Reasons why dividend policy is important Business finance 232
Chart Main characteristics of bonds Business finance 233
Chart Bonds - 1 Business finance 234
Mnemonic Different forms of corporate bond Business finance 237
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Chart Internal sources of finance and dividend Business finance 238
policy
Chart The influence of interest rates on the Business finance 239
market value of bonds
Chart Convertible bonds Business finance 240
Chart The floor value of a convertible bond Business finance 241
Mnemonic Factors relating to a public issue of Business finance 242
corporate bonds
Mnemonic Advantages of eurobonds Business finance 243
Mnemonic Drawbacks in the eurobond market Business finance 244
Mnemonic Factors that should be considered by a Business finance 245
listed company when choosing between
the issue of debt and an issue of equity
Mnemonic Ways by which an unlisted company can Business finance 246
obtain funds
Chart The financing of SMEs Business finance 247
Mnemonic Reasons why SMEs gave difficulty in Business finance 248

raising finance
Mnemonic Source of funds for SMEs – using UK as Business finance 249
an example
Mnemonic Problems faced by SMEs in respect of Business finance 250
credit management
Mnemonic Steps that could be taken by SMEs to Business finance 251
minimise the effects of their poor credit
management
Mnemonic Purposes of venture capital Business finance 252
Chart The main financial markets Business finance 253
Chart The capital budgeting process Investment appraisal 254
Chart The ‘rolling’ capital budget system Investment appraisal 255
Mnemonic Seven steps involved in successfully Investment appraisal 256
evaluating and controlling a capital budget
Mnemonic Component parts of a ‘Business Case’ for Investment appraisal 257
an investment proposal
Mnemonic Possible benefits of an investment project Investment appraisal 258
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Mnemonic Main responsibilities of the ‘Capital Investment appraisal 259
Expenditure Committee’
Mnemonic Relevant (or opportunity) costs that would Investment appraisal 260
affect the future cash flow of a project
Mnemonic Costs which are not relevant when Investment appraisal 261
carrying out a DCF appraisal
Chart Capital investment appraisal techniques Investment appraisal 262
Mnemonic The main capital investment evaluation Investment appraisal 263
techniques and criteria
Mnemonic Limitations of the payback period method Investment appraisal 264
of capital investment appraisal
Mnemonic Advantages of the payback period method Investment appraisal 265
of capital investment appraisal
Mnemonic Limitations of the Accountant’s Rate of Investment appraisal 266
Return (ARR) measure for evaluating
capital investment proposals
Mnemonic Strengths of the ARR measure Investment appraisal 267
Mnemonic Advantages of using discounted cash flow Investment appraisal 268
(DCFR) techniques for capital investment
appraisal
Mnemonic Data required to calculate the net present Investment appraisal 269
value (NPV) of an investment project
Mnemonic Advantages of IRR over NPV Investment appraisal 270

Mnemonic Limitations of using the IRR measure for Investment appraisal 271
capital investment appraisal
Mnemonic Advantages of NPV over other investment Investment appraisal 272
appraisal techniques
Mnemonic General limitations of net present value Investment appraisal 273
(NPV) when applied to investment
appraisal
Mnemonic Steps taken to address the limitations of Investment appraisal 274
NPV analysis
Chart Capital investment appraisal applications Investment appraisal 275
To manage a business well is to manage its future: and to manage the future is
to manage information.
Marion Harper
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Chart Effects of inflation on NPV Investment appraisal 276
Chart NPV and risk Investment appraisal 277
Chart Business and financial risks Investment appraisal 278
Mnemonic Factors contributing to business risk Investment appraisal 279
Mnemonic Factors contributing to financial risk Investment appraisal 280
Mnemonic Ways that risk can be managed in capital Investment appraisal 281
investment
Mnemonic Problems of using the ‘expected value’ Investment appraisal 282
approach when making investment
decisions
Mnemonic Limitations of sensitivity analysis Investment appraisal 283
Chart The lease or borrow-to-buy decision Investment appraisal 284
Mnemonic Advantages of leasing assets Investment appraisal 285
Mnemonic Disadvantages of leasing assets Investment appraisal 286
Chart Capital rationing: Overview Investment appraisal 287
Mnemonic Hard capital rationing: Investment appraisal 288
characteristics and reasons for
Mnemonic Soft capital rationing: Investment appraisal 289

characteristics and reasons for
Mnemonic Exploiting opportunities which are Investment appraisal 290
rejected because of capital rationing
Mnemonic Limitations of using the Profitability index Investment appraisal 291
(PI) in a capital rationing situation
Chart Capital Replacement Theory - 1 Investment appraisal 292
Chart Capital Replacement Theory - 2 Investment appraisal 293
Mnemonic The factors to consider in a replacement Investment appraisal 294
decision
Chart The process of capital budgeting and Investment appraisal 295
investment appraisal: overview
Mnemonic Four different ways of valuing a company Business valuations 296
(or an equity share)
Mnemonic Purpose of company or share valuation Business valuations 297
Mnemonic The main implications of the ‘Efficient Business valuations 298
Market Hypothesis’
Chart Different methods of valuing a company Business valuations 299
or its shares
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Mnemonic Weaknesses of the dividend valuation Business valuations 300
model
Mnemonic Assumptions underlying CAPM Cost of capital 301
Chart Systematic and unsystematic risk Cost of capital 302
Mnemonic Limitations of using the beta factor Cost of capital 303
Chart Traditional gearing Cost of capital 304
Chart Traditional gearing ratios Cost of capital 305
Chart Managing foreign currency risk Cost of capital 306
Mnemonic The uniqueness of the foreign exchange Risk management 307
(FE) market
Mnemonic Factors that affect a currency’s supply Risk management 308
and demand and thus its price
Mnemonic Forecasting exchange rates Risk management 309
Mnemonic Four ways of forecasting (estimating) Risk management 310
future currency rates
Chart Four-way Equivalence Model Risk management 311
Mnemonic Techniques available to help reduce Risk management 312
foreign exchange risk involved in foreign
trade or business
Mnemonic The steps involved when using a money Risk management 313
market hedge to cover foreign currency
payments
Mnemonic Advantages of using futures to hedge Risk management 314
risks compared with a forward exchange
contract
Mnemonic Difficulties of using futures to hedge risks Risk management 315
Mnemonic The reasons for using currency options Risk management 316
Mnemonic Benefits of currency swaps Risk management 317

Mnemonic Drawbacks of currency options Risk management 318
Chart Currency and interest rate management Risk management 319
Mnemonic Pattern of interest rates Risk management 320

Mnemonic Reasons why interest rates may be Risk management 321
expected to fall
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MAP NEXT CHART NEXT MNEMONIC
Financial performance analysis

- overview
Start here and Financial
follow the Analysis
numbers ….
Appraisal/
evaluation 1
 Management
 Investors Who needs
 Potential investors to
 Creditors analyse?
 Other lenders
 Employees Overtrading
Stakeholders
2
 Profit and Loss Account Danger of
(Income statement) liquidation
 Balance Sheet
Other data are also useful: 8 9

 Cash flow forecasts What data is
 Industrial statistics used for the Scope for Financial
 Details of accountancy policies analysis? improvement problems
 Post-balance sheet events
 Government statistics Control Management
 Inflation adjusted figures Internal/ action action
external
3 required required
4 5 6 7
Main comparisons:
 Time series analysis

(over different periods of What basis of What to How to What to
time) analysis? measure? measure? learn?
 Interfirm comparison
 Against objectives
(budgets, etc.) Analytical
Comparisons Criteria Information
techniques
Five main areas of appraisal: Three main techniques:
 Earnings  Common sizing

- profitability (vertical analysis)
- capital efficiency  Horizontal analysis
 Growth  Ratio analysis
 Risk
 Control
 Shareholders’ investments

Start Financial performance analysis –

here
and
follow
categories of ratios
the
arrows
FINANCIAL EARNINGS
ANALYSIS RISK MEASURES
MEASURES
 RONA (Net profit x 100/net assets)

 NET MARGIN (Net profit x 100)/
Vertical analysis sales revenue) GEARING
(Common-sizing)  NET ASSET TURNOVER
(Profit x 100/net assets employed)
 GEARING (Debt/equity value) (times)
(There are other ways of
calculating this ratio)
Horizontal analysis  INTEREST COVER
PROFITABILITY
(Side-by-side) (Profit before interest and tax/
interest payable)
 GROSS MARGIN (Gross profit x 100/

sales revenue)
 OPERATING MARGIN LIQUIDITY
Ratio analysis
(Profit before interest and tax x 100/
sales revenue)
 COST OF SALES PERCENTAGE  CURRENT RATIO
(Cost of sales x 100/sales) (Current assets/current liabilities) (times)
 COST MEASURES (Each element of cost  QUICK RATIO
Usually based on: x 100/sales) ((Current assets – inventory)/
current liabilities)
 Income statement ……
1 year CAPITAL
 Balance sheet
EFFICIENCY WORKING CAPITAL
…… Assets
CONTROL
Performance is MEASURES
normally conducted by  FIXED ASSET TURNOVER
comparisons (Profit x 100/fixed assets employed)
 CURRENT ASSET TURNOVER  INVENTORY TURNOVER
(Profit x 100/current assets) ((Inventory value x 365)/purchases) (days)
 INVENTORY TURNOVER  CREDITORS PAYMENT PERIOD
THROUGH SALES (Accounts payable x 365/purchases) (days)
Basis for performance (Profit x 100/inventory)  DEBTORS COLLECTION PERIOD
comparisons: (Accounts receivable x 365/sales) (days)
 Time-series analysis
(Trend analysis over
GROWTH INVESTORS’
periods)
 Cross-sectional analysis MEASURES RATIOS
(inter-firm analysis)
 Budgets  EARNINGS-PER-SHARE GROWTH (%)  DIVIDEND YIELD

 Other objectives  SALES REVENUE GROWTH (%) (Dividend per share x 100/
 Inter-unit/ division/  DIVIDEND COVER market price per share)
department (Profit after interest and  PRICE EARNINGS RATIO
 Geographical tax/total dividend) (times) (Market price per share/
 RETENTION % earnings per share)
(1 – (Dividends for the year x 100%/  DIVIDEND COVER
profits after interest and tax)) (Earnings per share/
 DIVIDEND YIELD dividend per share) (times)
(Total dividend x 100/  EARNINGS YIELD
CRITERIA earnings for ordinary shareholders) (Earnings per share x 100/
used for Market price per share)
 RETURN ON EQUITY
comparisons
(Net profit x 100/
equity value (book or market value)

The RONA Pyramid

RETURN
ON NET ASSETS
Net profit/Net assets x 100 = %
Sub-analysis
Capital turnover
Profit margin
(Activity)
Profit/Sales x 100 = % Sales/Net assets = times
Sub-analysis Sub-analysis
Sales/Current assets
Total cost/Sales x 100 Sales/Fixed assets = times
= times
Sub-analysis Sub-analysis Sub-analysis
Fixed costs/Sales x 100 Variable cost/Sales x 100
Rent/Sales x 100 = % Sales/Land value = times

Rates/Sales x 100 = % Sales/Property value = times
Deprec./Sales x 100 = % Sales/Plant & Equip. value = times
Insurance/Sales x 100 = % Sales/Vehicle values = times
Etc. Sales/Fix. and Fittings = times
Etc.
Material costs/Sales x 100 = % Sales/Inventory value = times

Labour costs/Sales x 100 = % Sales/Receivables = times
Variable overhead/Sales x 100 = % Sales/Cash = times
Insurance/Sales x 100 = % Etc.
Etc.

Implications/issues of the ROI measure
The ROI ratio (sometimes called RONA [return on net assets] or ROCE [return on capital employed])
measures the overall effectiveness of management in generating profits with its available resources. It is
a key, but rough, measure of performance. Although ROI shows the extent to which earnings are
achieved on the investment in the business, the actual value is generally somewhat distorted.
There are basically three ratios that evaluate the ROI. They are: net profit margin, net assets turnover, and
return on equity.
The implications/issues of the ROI measure are:
C Company’s cost of capital. Is the ROI high enough with regard to the company's marginal cost
of capital (say the bank's overdraft rate)?
O Other companies/competitors/industrial norm. How does the ROI compare against other
companies (competitors) or divisions (within the company)?
A Asset valuation. Are assets correctly valued? (The ROI ratio is overstated if the assets are
under-valued.)
S Shareholders’ cost of capital. Consider the overall return. Is the ROI high enough with regard
to shareholders' cost of capital? (The return the shareholders could earn elsewhere at the same
level of risk.)
T Trend of the ROI. Is the trend satisfactory/unsatisfactory?
A company can’t COAST along happily – even when the ROI is high!
The very best financial presentation is one

that’s well thought out and anticipates any
questions … answering them in advance.
Nathan Collins
Executive Vice
President
Valley National Bank
CFO, August 1985

Measuring
financial
5 criteria …. performance -
So …… overview
There are 5 main criteria for measuring financial
performance
1. Earnings measures
- principal measures, sub-analysed as:
- profitability
- capital efficiency
2. Growth measures
3. Risk measures
- gearing
- liquidity
4. Working capital control measures
5. Investors’ ratios
And ……
There are 3 techniques for measuring
3 techniques …. financial performance
1. Vertical analysis (‘Common-sizing’)

2. Horizontal analysis (‘Side-by-side’)
3. Ratio analysis

The FIVE main groupings for financial

performance analysis
There are many ratios that an analyst can use, depending on what he or she considers to be important
relationships. For our purposes we will classify ratios into five groups:
S Shareholders’ investment measures. The main measures are:

- Dividend yield (Dividend per share/market price per share x 100).
- Earnings per share (Earnings for ordinary shareholders/number of shares eligible for dividend).
- Price earnings ratio (Market value per share/earnings per share).
- Dividend cover (Earnings per share/dividend per share).
- Earnings yield (Earnings per share/market price per share x 100).
- Return on equity (Earnings for ordinary shareholders/equity (book or market) value x 100).
U Underlying control measures. The main measures are:
- Inventory turnover (Inventory value x 365/purchases) (days).
- Payables period (Payables’ value x 365/purchases) (days).
- Receivables (Receivables’ value x 365/sales) (days).
R Risk measures. The main measures are:
- Gearing (Debt/equity). (There are other ways of calculating this ratio.)
- Interest cover (Profit before interest and tax/interest payable).
- Current ratio (Current assets/current liabilities)
- Quick ratio (sometimes called ‘Acid test’) (Current assets – inventory value/current liabilities)
G Growth measures. The main measures are:
- Earnings-per-share growth (%).
- Sales revenue growth (%).
- Dividend cover (as shown above)
- Retention % (1 – (dividends for year x 100/profits for ordinary shareholders).
- Dividend yield (as shown above).
E Earnings measures. The main measures are:
- ROI (or RONA or ROCE) (Net profit/net assets x 100).
- Net margin (Net profit/sales revenue x 100).
- Net asset turnover (Net profit x 100/net assets employed).
(Operating profit may be used in place of net profit in all three of these ratios.)
A company’s share price will SURGE ahead when these measures are
consistently favourable.

The implications of the growth measures

used by financial managers
R Retention percentage ratio. The retentions percentage is the inverse of the dividend cover
(explained below) and provides much the same information.
E Earnings per share growth %. This is an important ratio for the present and prospective
shareholders and management. The earnings per share represent the number of £s earned on
behalf of each outstanding share of equity capital. They are closely watched by the investing
public and are considered an important indicator of corporate success. The value does not
represent the amount of earnings actually distributed to shareholders. Growth (year by year)
suggests strong corporate performance.
D Dividend cover ratio. The dividend cover indicates (a) the proportion of distributable profits for
the year that is being retained by the company; and (b) the level of risk that the company will not
be able to maintain the same dividend payments in future years, should earnings fall. A high
dividend cover means that a high proportion of profits are being retained, which might indicate
that the company is investing to achieve earnings growth in the future.
S Sales revenue growth %. The sales growth when measured against industry growth for the
same period can provide useful information about the company's share of the market. Sales
growth can also be used to evaluate the company's marketing, such as the effectiveness of an
advertising campaign run during the period of report.
A company will usually keep out of the REDS on the stock exchange board
when these measures are strong.
Growth for the sake of growth is the ideology of

the cancer cell.
Edward Abbey

Reasons/benefits of financial ratio analysis

Ratio analysis is widely used for analysing a company and is frequently employed by external stakeholders -
creditors, investors and financial institutions, as well as by senior management for internal performance
appraisal. In more detail, the technique can help in the following ways:
I Identifies a moving picture of trends. A 'moving picture of the company', i.e. trends over a
period of years can be analysed (‘time-series analysis’).
S Segregates performance. It segregates performance into distinct groups such as: earnings,
growth, control, risk and investment.
M Models and simulates. Ratios can be used for modelling and simulation purposes. Many large
corporate finance models are based on ratios.
A Accounting software facilitates the quick production of ratios.
G Government statistics. Ratios allow a company to compare its performance against macro-
economic indices produced by government.
I Industrial norms. Ratios allow for comparison of the company’s performance with other
companies or the industry average, and hence for management to make judgement about the
company's position in the competitive arena. Most inter-firm comparison schemes are based on
ratios. Internal comparisons (between divisions/departments) are also made possible.
C Comparison with the budget for the same period. Management can use ratios to compare
results with the budget covering the same period.
It IS MAGIC the way ratios can reveal a picture of performance results.

Limitations of ratio analysis

The analytic approach used in ratio analysis must be used with circumspection and in conjunction with other
analytical tools and techniques as it has a number of limitations. The limitations include the following:
O Orientation that is historical. The approach is based on historical data and thus the ratios may
not be a good guide to the future;
F Financial measures are used. Ratios are normally based exclusively on finance, and reflect
only financial indicators of performance. There are, of course, non-financial implications
associated with performance.
T Trading environments change over time. The changing value of money and differences in
trading environments over time influence the ratios.
S Sub-optimal results might be encouraged. The use of ratios to measure performance may
encourage sub-optimal behaviour by managers, e.g. short term manipulation of results.
A Accountancy practice influences the ratios. Differences in accounting practices adopted by
companies over the treatment of fixed asset depreciation and revaluation, stock valuation,
research and development expenditure, goodwill, write-off and profit recognition affect the ratios.
I Interpretation of change. Difficulties in deciding on a suitable yardstick and the interpretation of
change, e.g. is a higher return on net assets (ROI) good or bad?
D Distortion can be a result. The quality of the analysis is determined by the quality of the
accounting information upon which it is based (consider here the distortion that can result from
'creative accounting', such as 'window dressing' of financial statements to hide short-term
fluctuations).
It’s OFT SAID that too much emphasis is placed on only using ratio
analysis.
The numbers tell you how your business is going, not why.
Jonatghan P. Siegel
Speech, McLean, Virginia, 12 September, 1987

Information required for meaningful ratio

analysis
For meaningful financial ratio analysis and other performance analysis the following information would be
useful:
I Information and details concerning future plans of the company.

F Fixed assets. Details of fixed assets, with projected remaining lives and likely replacement costs.
A Accounts adjusted to take account of inflation during the period under review.
C Cash flow forecasts.
C Current financial statements. Balance sheet [Statement of Affairs], Profit and Loss Statement
[Income Statement] and Cash Flow Statement.
A Accountancy policy and changes to it. Details of the company's accounting policies and
changes to any basis of accounting.
B Budgets and associated variances. Details of the company's budget plans with a schedule of
variances.
A After balance sheet events (post-balance sheet). Details of any post-balance sheet events,
and of any contingencies.
S Statistics provided within the industry. Statistics of the industry as a whole, and in particular
financial and other ratios showing best, industry average and worst results.
E Economic indicators and other macro-environmental factors. Government statistics
concerning inflation and interest levels and other economic indicators.
IF ACCA BASE a question on what information is required for financial

performance analysis to be meaningful then this is a useful list.

Overtrading
Extending turnover too quickly
Overtrading is a problem which arises from a firm extending its turnover at too rapid a rate. The ultimate result is a serious
shortage of cash which means that wages, creditors and corporation tax cannot be met.
A typical pattern of events
A typical pattern of events commence when a firm takes on additional orders. This would then be followed by engaging
additional workers or working overtime. At the same time, extra materials would be purchased on credit. If the working capital
cycle is fairly long this means that although extra cash has to be paid out more or less immediately, additional revenue may not
be forthcoming for a considerable period. This assumes that the additional production will be sold without delay, but in some
circumstances the process may take the form of build up of stock. If this is the case, then the shortage of cash may
necessitate an emergency sale at greatly reduced prices and this is likely to have adverse effects on profitability.
CHARACTERISTIC OF SYMPTONS OF
OVERTRADING OVERTRADING
The characteristics, or features of an overtrading situation Over the period ….

include the following:
 Growth in sales.
 The firm is under-capitalised (i.e. there are  Growth in the volume of assets.
insufficient funds or credit lines).  Reduction in the firm’s liquidity.
 The firm is probably profitable.  Increase in inventory turnover period (days).
 The firm has problems maintaining its asset base  Increase in debtors’ assets (including the
(non-current and current assets) with the level of its Accounts receivable collection period [days]).
activities.  More use made of short-term credit (e.g.
 Management may be focusing on sales (‘top line’) at increase in Accounts payable payment period
the expense of the costs (‘middle line’) and profit [days]).
(‘bottom line’).  Increase in financial gearing.
 The firm’s sales may be growing too fast and  Quality problems
outstripping the available working capital.
 The firm’s quality is suffering (because of some of
Measures for assessing the
the points raised above).
extent of overtrading
 Inflation simply exacerbates the problems
An exam question that requires you to assess the extent of a firm’s overtrading position would need to present;
 Two or more years’ of financial data, and/or data concerning industrial/sector averages.
Key amounts, measure and ratios would be: YEAR 1 YEAR 2
 Increase in sales revenue (%) XX %

 Gross margin (Gross profit x 100)/sales revenue) XX % XX %
 Increase in non-current assets ($) $XX
 Non-current asset turnover ratio (Sales revenue x 100/
non-current assets employed) XX %
 Total working capital ($) $XX $XX
 Inventory turnover through sales (Sales revenue/average inventory) XX times XX times
 Inventory turnover ((Inventory value x 365)/purchases) XX days XX days
 Payables period ((Payables value x 365)/purchases) XX days XX days
 Receivables collection period ((Receivables value x 365)/sales revenue) XX days XX days
 Reduction in liquidity (cash and bank overdraft levels) $XX $XX
 Current ratio (Current assets/current liabilities) XX times XX times
 Quick ratio (Current assets – inventory value)/current liabilities) XX times XX times
 Financial gearing (Debt x 100/equity funds) XX % XX %
YOUR COMMENTS WOULD BE AN IMPORTANT PART OF AN EXAM ANSWER.

Combined analysis
The most informative approach to ratio analysis is one that combines cross-sectional (inter-firm)
and time-series analysis. A combined view permits assessment of the trend of behaviour of the
ratio in relation to the trend for the industry. The diagram below depicts this type of approach
using a company's average debtor collection period in the years 2005 to 2008.
Combined cross-sectional and time-series analysis of the

average collection for the period 2005 - 2008
Fairy Nuff Engineering plc

70
Average collection period (days)
60
50
40
Industry average
30
20
10
2005 2006 2007 2008 2009 1010

Year
Average collection period for Fairy Nuff Engineering plc
There’s few things as uncommon as common sense.
Frank McKinney Hubbard, 1868 – 1930

American caricaturist and humorist

Characteristics of overtrading
Overtrading is a problem which arises from extending turnover at too rapid a rate. The ultimate result is a
serious shortage of cash which means that wages, creditors and corporation tax cannot be met.
When a company is overtrading this is marked by large increases in sales which are not matched by
increases in the asset base to support the greater level of activity. Working capital is used more
intensively and there is little increase in the level of fixed assets. Expansion is financed by short term
credit, and stock and debtor turnover can slow as the company tries to secure additional sales on the basis
of improved credit terms and as it tries to manufacture ahead of demand.
When analysing the situation shown on a Balance Sheet/Income Statement it is very important to watch for
signs of overtrading. Some of the more important of these signs are summarised below.
S Sales growing too fast. Very rapid growth in sale turnover. The ‘Growth of sales ratio’
would be a useful indicator.
A Asset maintenance. Inventories may increase more proportionately than the increase in sales
turnover with a deterioration in ‘Inventory turnover ratios’. Rapid growth in the volume of current
assets and possibly fixed assets. Consider here the ‘Asset turnover ratio’.
L Liquidity problems. Increased significance of credit in financing along with the growth in assets.
This may show in slower payment of payables and a bank overdraft which is close to its
limit. Similarly, a comparison of the period of credit being taken by the company with the norm for
the particular industry will be a guide. Look to see if there has been an increase in the ‘Payables
turnover ratio’. Also, look for any sudden upward or downward swing in cash figures, or the
appearance of new items such as short-term loans. The ‘Current ratio’ and ‘Quick ratio’ would
indicate the liquidity problem.
E Excessive inflation causing capital replacement problems.
S Sales focus to the exclusion of other factors. Management focusing on sales (advertising
expenditure, generous credit terms, price reductions, etc.) possibly at the expense of profits and
cash flow. The ‘Gross profit margin’ is an important indicator of sales to costs.
U Undercapitalisation. This often occurs because of a growth in the rate of borrowing so that the
proportion of borrowing in relation to the assets owned by shareholders is excessive.
Reductions in the current and quick ratios, possibly leading to a liquid deficit. The ‘Gearing ratio’
and ‘Cash Flow’ would be used here.
P Profitable, but! Total profit, gross and/or net, begins to diminish
A company’s SALES may be UP but its cash could be seriously down. It

might be overtrading.

Ratios/measures that can be used to indicate

overtrading
When a company is overtrading this is marked by large increases in sales which are not matched by
increases in the asset base to support the greater level of activity. Working capital is used more
intensively and there is little increase in the level of fixed assets. Expansion is financed by short term
credit, and inventory and debtor turnover can slow as the company tries to secure additional sales on the
basis of improved credit terms and as it tries to manufacture ahead of demand.
To carry out a meaningful appraisal two or more years of data are required including industry/sector
statistics.
Signs that a company may be overtrading include the following:
G Gross margin. (Gross profit/sales revenue x 100).

I Increase in bank overdraft $. (Current level – previous level).
A Asset turnover ratio (particularly fixed asset turnover) (Gross profit/fixed assets employed x 100)
N Net working capital size. (Current assets – Current liabilities). (Current compared with previous).
T Turnover of inventory through sales. (Sales revenue/inventory) (times)
C Current ratio. (Current assets/current liabilities) (times)

A Acid test (often called ‘Quick ratio’). Now (Current assets – inventory/current liabilities) (times).
R Reduction in liquidity ($). (Bank + cash – overdraft) (current compared with previous).
T Turnover of inventory in days. (Inventory value x 365/purchases or cost of goods sold) (days).
R Receivables payment days. (Receivables value x 365/sales) (days).
I Increase in fixed assets %. (Current fixed asset value – previous fixed asset value/previous
fixed asset value x 100)
P Payments days. (Payables x 365/purchases) (days).
S Sales revenue increase%. (Current sales – previous sales/previous sales x 100).
GIANT CAR TRIPS don’t have anything to do with overtrading, but the
mnemonic does give you a list of 13 ratios or other measures than can be used to
assess whether a company is overtrading.

Parties who need to analyse corporate

financial figures in addition to management
Financial analysis is an evaluation of both the company's past financial performance and its prospects for the
future. Typically, it involves an analysis of the company's financial statements and its flow of funds. Financial
statement analysis involves the calculation of ratios and also uses other ways of measuring.
The analysis of a firm's financial statements is of interest to a number of different groups including present and
prospective shareholders, creditors, and the firm's own employees.
S Shareholders - current. The present shareholders are interested in the current and future level
of risk, liquidity, activity, debt and return (profitability). These are the dimensions which
influence share price.
C Creditors. The firm's creditors, such as the bank, are primarily interested in the short-term
liquidity of the firm and its ability to service its debts over the long run. Present creditors want
to assure themselves that the firm is liquid and that it will be able to make scheduled interest
and principal payments. Prospective creditors are concerned with determining whether the firm
can support the additional debt that would result if they extended credit to the firm.
O Other lenders, such as customers who pay forward on a contract would want to assess the
financial stability of the company.
P Potential investors. In the same way as the company’s present shareholders, prospective
shareholders are interested in the current and future level of risk, liquidity, activity, debt and
return (profitability). For this reason, the business advisory group is also interested in carrying
out performance analysis.
E Employees. Employees (present, past with pension, and potential)), like the shareholders, are
concerned with all aspects of the firm's financial situation. Employee representatives (such as
trade unions) would need to evaluate the company’s position with regard to negotiating pay rises
(pay increments).
There is a big SCOPE of different people who have an interest in the

financial standing and performance of a company
EVER ONWARD – EVER ONWARD
That’s the spirit that brought us fame!

We’re big, but bigger we will be.
We can’t fail for all to see,
That to serve humanity has been our aim.
Our products are now known in every zone.
Our reputation sparkles like a gem.
We’ve fought our way through, and new
Fields we’re sure to conquer too.
Forever onward IBM.
IBM Company Song

Reasons why comparisons should be based

on companies in the same industry or market
sector
Comparison of the company’s performance with that of other companies operating in the same industry or
market sector is a significant part of performance assessment. By carrying out inter-firm assessment
management is able to (i) compare operating and financial performances and identify strengths and
weaknesses in the organisation; (ii) contrast strategic structures and detect threats and opportunities,
product-market gaps, competitive moves and market movements; (iii) plot take-over bids, or alternatively
plan defensive measures to avert possible take-over strikes by other companies; (iv) assess the
company's worth (or the disposal worth of divisions) and (v) view the company through the eyes of
interested parties, e.g., the capital market, trade unions, employees and creditors.
Methods of conducting inter-firm comparisons include: (i) subscription to a formal scheme; (ii) informal and
internal research (which uses data provided by the relevant trade association and central government);
and (iii) benchmarking exercises.
It is centrally accepted that comparisons should be made with companies operating in the same industry or
sector for the following reasons.
W Working capital. Different industries have different working capital requirements. For example,
the retail sector will have a much lower level of debtors than the manufacturing sector due to the
different levels of inventory. Similarly, manufacturing concerns generally require a much greater
investment in inventory than do service providers.
A Applicable for the ‘investor group’. Investors often group in sectors, and therefore the internal
comparison will be similar to the comparisons made by the company’s investors.
F Fixed costs level. Different industries have different levels of fixed costs. For example, the fixed
costs of service providers are generally a lot lower than for companies involved in heavy
engineering.
E Earnings volatility. There will be different levels of earnings volatility in different industries and
market sectors influenced by seasonal fluctuations and cyclical changes. For example, the
furniture retail sector is more influenced by the business cycle (say a downturn in the economy)
than the food retail sector.
R Risk. Leading from the last point, business risk is also different between industries making it
impossible to compare important performance indicators.
Without inter-firm (or inter-sectional) comparison within the same industry or

market sector the exercise of financial performance analysis is WAFER thin.

The difficulties involved in inter-firm

comparison.
The comparison of financial information (such as ratios) from one firm to another, even in the same industry,
involves a number of difficulties, particularly in the following.
I Inventory valuation. The method of accounting for inventory (FIFO, average cost, etc.) may
vary.
D Depreciation. Depreciation calculations and rates may differ.
E Expenses. When comparison of different items of expense is possible, then there might be
inconsistency in the classification of costs under the main headings of operating costs, marketing
costs and administration costs, etc. and also in the method of apportioning common costs.
A Asset valuation. Where historical values are used the asset-based ratios will vary according to the
average age of the assets held which would be different company by company.
S Several ways of valuing work in progress and finished goods. The cost content of work in
progress and finished goods inventory may differ. Some companies will include a share of
administration costs, others will cut off at factory cost or include direct costs only.
A number of trade associations or federations have prepared manuals of standard practices in accounting for
their members (which are in additional to the GAAP standards) and these help to make reported results
more suitable for comparative analysis.
Financial managers need IDEAS on how to make the necessary corrections

for distortions caused by lack of uniformity in the way that financial information is
reported by different companies.
A problem well stated is a problem half solved.
Charles F. Kettering

Macroeconomics
Macroeconomics
This involves the study of the entire economy. (For accountancy students, the specific areas are
anticipated government/central bank economic policy; and economic events and influences which
affect decisions of financial/treasury managers, mainly changes, and anticipated changes in the rates of
interest, inflation and currency exchange rates.)
Macroeconomic policy
The conduct of government/central bank policy in such a way as to influence the performance and
behaviour of the national economy as a whole.
Macroeconomic models and the forecasts they provide are used by both governments and large companies
to assist in the development and evaluation of economic policy and business strategy.
Macroeconomics then is a branch of ‘Economics’ that deals with the performance, structure, and behaviour
of the economy as a whole. Macroeconomists seek to understand the determinants of aggregate trends
in the economy with particular focus on the following:
N National income (Gross National Product, etc.), projections and targets.

A Aggregate unemployment and regional unemployment and causes of.
T Trends in foreign exchange rates, causes and lessons learned, etc.
I Interest rates and their effect on the economy.
O Outward investment, trends and implications.
N Net trade figures (exports less imports).
A Accrued government debt and current public sector borrowing requirements.
L Level of inflation, causes and implications.
Macroeconomics has a NATIONAL prospective.
Reference:
Wikipedia

The economic goals of government
Increase/
maintain
economic Avoid
Eradicate
growth extreme
extreme
economic
poverty
fluctuations
ECONOMIC
OBJECTIVES OF
UK
GOVERNMENT
Sustain a
‘healthy’
Maintain
(controlled)
price stability
balance of
Achieve full
payments
employment
He slept beneath the moon,

He basked beneath the sun,
He lived a life of going-to-do,
And died with nothing done.
James Albery, 1839 – 1889

English playwright
Epitaph for himself

Main economic goals of most governments

The main economic aims of government (and the central bank which usually acts as an independent agency)
are sixfold:
F Full employment. Government aims to reduce the number of involuntary unemployed people to an acceptable
level, or the creation of more jobs. (It is possible to create more jobs without reducing unemployment, e.g. by more
school leavers entering the jobs market than new jobs being created.)
I Inflation control and price stability. Government have a continuous policy of containing the rate of national
inflation at an acceptable level.
G Growth of gross national product. Economic growth happens when there is an expansion in national
income (gross national product) in relation to the size of the population. Measures of national income and output are
used in economics to estimate the value of goods and services produced in an economy. They use a system of national
accounts (or national accounting) first developed in the 1940s. Some of the more common measures are
Gross National Product (GNP), Gross Domestic Product (GDP) and Net National Income (NNI). There are at least
two or three different ways of calculating these numbers. The expenditure approach determines aggregate demand
(or Gross National Expenditure), by summing consumption, investment, government expenditure and net exports. On
the other hand, the income approach can be seen as the summation of wages, rents, interest, profits, non-income
charges, and net foreign income earned.
H Healthy, controlled balance of payments. When the balance of visible (trading) and invisibles (investment
income) are combined they form what is effectively the nation's current balance of payments.
(i) The capital account

The flow of investment and capital flows provide (the concept of) a capital account.
(ii) Interaction of the two flows
The two sets of flows are likely to move in the same direction, e.g. a balance of payments surplus would be taken
as a sign of economic strength by other countries and attract capital; a deficit as a sign of weakness with
money moving out of the currency.
Government/Central Bank policy to counteract these tendencies
(i) The Central Bank might raise interest rates in an attempt to counteract the fall in the value of the home currency.
(ii) Convincing overseas financiers/merchants that the Government is taking effective action to reverse a weak
economy.
(iii) Maintaining controls over the moment of money owned by its own nationals. (An unlikely policy in most countries,
but it can happen.)
T Trim the economy – reduce the economic fluctuations. Unmanaged economies tend to grow in
cyclical fashion - periods of recession followed by recovery, then boom. Problems with this economic tendency
are:
(i) In recession there are unemployed assets and lost output.
(ii) In boom the economy is in danger of overheating leading to an increase in demand-inflation, with a consequent
loss of international competitiveness of the nation state.
The Bank of England (BOE) (or central bank of most national economies) intervenes to avoid the economy overheating
with two main policy instruments
(i) By increasing the BOE's 'repo' rate of interest
(ii) By taking money out of the economy
S Share wealth and reduce extreme poverty. Government policy attempts to eradicate extreme poverty by
redistributing factor incomes - normally by transferring funds from profits, rents, interest and wages into social services
payments, such as unemployment benefits, family aid and so on. The policy is usually achieved by taxation policy
e.g., corporate tax, value-added tax (VAT) and personal direct taxes.
The Government FIGHTS hard to improve economic conditions in the

country.

Main sources of inflation

Demand inflation occurs when demand and purchasing power outstrips (exceeds) the rate of output (supply).
Options for government to reduce demand include:

 increasing taxation (corporate, VAT, direct taxes) - to cut consumer spending,
 lowering government expenditure (and lower government borrowing) with the aim of using the multiplier effect
to spread out in reverse.
 increasing interest rates (Bank of England policy).
Expected effect inflation occurs because of an

anticipation that inflation will occur within current
wages bargaining and price adjustments. For Costs rise because of a shortage of factors of supply.
example, employees negotiating an annual wage Money is such a factor, but there are others,
settlement who anticipate an increase in inflation particularly labour. A shortage of labour tends to
during the year ahead would consequently demand cause an increase in the level of wages.
a higher rate of wage increase to compensate
for this future inflation. In this respect, inflation Options for government to increase the factors of
becomes a self-fulfilling prophesy. supply include:
 de-regulating labour markets (e.g. reducing the
Options for government to reduce the self power of trade unions to impose 'closed shops'),
fulfilling influences include:  encouraging greater productivity,
 applying controls over wages and price rises
 pursuing clear policies which indicate its (prices and incomes policy)
intention to contain/reduce rates of inflation, Demand  encourage immigrant labour
 not practising 'U-turn' economic policy. inflation
Expectations
Cost
effect
inflation
inflation
Source
of inflation
Money-supply Imported
inflation inflation
Money supply inflation results from an over expansion of

the money supply. (A simplistic explanation of the Imported inflation is a consequence of prices rising
'Monetarists' position on the relationship between money because of the weakening (softening) value of the
supply and the rate of inflation, is that inflation is caused by country's foreign exchange rate against other
money supply growth - 'too much money chasing too few trading currencies. The result of this is that
goods'.) imports cost more..
Options for government/Central Bank to reduce the rate of Options for government to counter-balance foreign
money supply growth include: exchange disadvantages include:
 cutting the public sector borrowing requirement (PSBR),  appreciation or depreciation of the domestic
 funding the PSBR by borrowing from the non-bank currency rate (rare),
private sector (which would pull money from other  the Central Bank raising interest rates to
corporate and private investments), counteract fall in currency value,
 control or reduction of bank lending,  trying to achieve a balance of trade (imports
 using interest rates to deter money supply growth (e.g. and exports).
the higher the rate of interest the less attractive
investments become; less money would be borrowed
and thus 'created').

Sources of inflation
A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices -
inflation - reduces the value of money. Monetary policy is directed at achieving this objective and providing a framework for non-
inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through
influencing the price of money - the interest rate, In May 1997 the Government gave the Bank of England independence to set
monetary policy by deciding the level of interest rates ('repo rates') to meet the Government's inflation target - currently 2% (August
2007).
Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy.
Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be
damaging to the functioning of the economy. Low inflation can help foster sustainable long-term economic growth.
Financial managers need to be aware of:

- the probable level of future inflation, and
- the effects on their organisation of likely government (central bank) policies to deal with rising inflation.
There are five types (or sources) of inflation, some of which overlap, which might lead the government (central bank) to pursue
deflationary policy:
M Money supply inflation. Money supply inflation results from an over expansion of the money supply. (A simplistic
explanation of the 'Monetarists' position on the relationship between money supply and the rate of inflation, is that
inflation is caused by money supply growth - 'too much money chasing too few goods‘.) Options for government
(central bank) to reduce the rate of money supply growth include:
- cutting the public sector borrowing requirement (PSBR),
- funding the PSBR by borrowing from the non-bank private sector (which would pull money from other corporate
and private investments),
- control or reduction of bank lending,
- using interest rates to deter money supply growth (e.g. the higher the rate of interest the less attractive
investments become; less money would be borrowed and thus 'created').
E ‘Expectations effect’ inflation. Expected effect inflation occurs because of an anticipation that inflation will
occur within current wages bargaining and price adjustments. For example, employees negotiating an annual wage
settlement who anticipate an increase in inflation during the year ahead would consequently demand a higher rate of
wage increase to compensate for this future inflation. In this respect, inflation becomes a self-fulfilling prophesy.
Options for government to reduce the self fulfilling influences include:
- pursuing clear policies which indicate its intention to contain/reduce rates of inflation,
- not practising 'U-turn' economic policy.
D Demand inflation. Demand inflation occurs when demand and purchasing power outstrips (exceeds) the rate of
output. Options for government to reduce demand include:
- increasing taxation (corporate, VAT, direct taxes) - to cut consumer spending,
- lowering government expenditure (and lower government borrowing) with the aim of using the multiplier effect to
spread out in reverse.
- increasing interest rates (central bank policy, perhaps).
I Imported inflation. Imported inflation is a consequence of prices rising because of the weakening (softening)
value of the country's foreign exchange rate against other trading currencies. The result of this is that imports cost
more. Options for government to counter-balance foreign exchange disadvantages include:
- appreciation or depreciation of the domestic currency rate (rare),
- the central bank raising interest rates to counteract fall in currency value,
- trying to achieve a balance of trade (imports and exports).
C Cost inflation. Costs rises because of a shortage of factors of supply. Money is such a factor, but there are others,
particularly labour. A shortage of labour tends to cause an increase in the level of wages. Options for government to
increase the factors of supply include:
- de-regulating labour markets (e.g. reducing the power of trade unions to impose 'closed shops'),
- encouraging greater productivity,
- applying controls over wages and price rises (prices and incomes policy).
- encourage immigrant labour.
‘MEDIC’, may have no word association with ‘inflation’ but high levels of inflation
are unhealthy for an economy..

Government policy: Full employment

The Government aims to reduce the number of involuntary unemployed people to an acceptable level, or
the creation of more jobs. (It is possible to create more jobs without reducing unemployment, eg by more
school leavers entering the jobs market than new jobs being created.)
G Growth in private sector. Encouraging growth in the private sector.

E Encouraging training in job skills.
T Training grants to employers in selected regional areas.
S Spending money directly on jobs, e.g. employing more civil servants.
T Trade union ‘closed shops’ agreements disallowed or discouraged.

H Higher education and university places made available.
E Encouraging labour mobility.
M Minimum wage legislation. Careful balancing of minimum-wage legislation.
Memory jog: Government policy ‘GETS THEM’, (people) into work.

ACCA Paper F9 Mnemonics Revision (Sample Download)

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Paper F9: Financial Management

ACCA Paper F9 – Financial Management – Mnemonics and Charts

Good luck with your studies.

Chart The scope of financial management Financial management function 50

Mnemonic Managing payments from overseas Working capital management 117

Chart Miller-Orr Cash Budget Model Working capital management 155

Chart Risk/return trade-off - 1 Nature and role of financial 189

Mnemonic Sources of short-term finance Business finance 194

Chart Rights issue - overview Business finance 209

Chart Rights issue - 3 Business finance 212

Mnemonic Reasons why SMEs gave difficulty in Business finance 248

Mnemonic Advantages of IRR over NPV Investment appraisal 270

Mnemonic Soft capital rationing: Investment appraisal 289

Mnemonic Benefits of currency swaps Risk management 317

Mnemonic Pattern of interest rates Risk management 320

Financial performance analysis

Other data are also useful: 8 9

 Time series analysis

Five main areas of appraisal: Three main techniques:

 Earnings  Common sizing

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Start Financial performance analysis –

 RONA (Net profit x 100/net assets)

 GROSS MARGIN (Gross profit x 100/

 Budgets  EARNINGS-PER-SHARE GROWTH (%)  DIVIDEND YIELD

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The RONA Pyramid

Net profit/Net assets x 100 = %

Profit/Sales x 100 = % Sales/Net assets = times

Sub-analysis Sub-analysis Sub-analysis

Fixed costs/Sales x 100 Variable cost/Sales x 100

Rent/Sales x 100 = % Sales/Land value = times

Material costs/Sales x 100 = % Sales/Inventory value = times

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Implications/issues of the ROI measure

The implications/issues of the ROI measure are:

The very best financial presentation is one

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1. Vertical analysis (‘Common-sizing’)

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The FIVE main groupings for financial

S Shareholders’ investment measures. The main measures are:

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The implications of the growth measures

Growth for the sake of growth is the ideology of

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Reasons/benefits of financial ratio analysis

It IS MAGIC the way ratios can reveal a picture of performance results.

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Limitations of ratio analysis

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Information required for meaningful ratio

I Information and details concerning future plans of the company.

IF ACCA BASE a question on what information is required for financial

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