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Nature and purpose of financial management Prepared by William Armah for www.warmah.com

Nature and purpose of financial management

Nature and purpose of financial management Prepared by William Armah for www.warmah.com
Nature and purpose of financial management Prepared by William Armah for www.warmah.com
Nature and purpose of financial management Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

 Financial management can be defined as the management of the finances of an organisation

Financial management can be defined as the

management of the finances of an organisation in order to achieve the financial

objectives of the organisation.

Profitability for the organisation to minimise cost and to maximise return Liquidity the ability to meet its operating activities Safety or security to overcome undue risk

operating activities  Safety or security – to overcome undue risk Prepared by William Armah for
operating activities  Safety or security – to overcome undue risk Prepared by William Armah for
operating activities  Safety or security – to overcome undue risk Prepared by William Armah for

Prepared by William Armah for www.warmah.com

 Investment decision Short-term: working capital management Long-term: capital budgeting  Financing decision

Investment decision

Short-term: working capital management Long-term: capital budgeting

Financing decision

Financing mix, capital structure

Dividend decision

Dividend policy: zero, residual, constant,

stable dividend policies

decision Dividend policy: zero, residual, constant, stable dividend policies Prepared by William Armah for www.warmah.com
decision Dividend policy: zero, residual, constant, stable dividend policies Prepared by William Armah for www.warmah.com
decision Dividend policy: zero, residual, constant, stable dividend policies Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

Primary objective:  Maximisation of return to the shareholder Secondary objectives  customer satisfaction 

Primary objective:

Maximisation of return to the shareholder

Secondary objectives

customer satisfaction

increase in market shares

Growth

Survival

innovation

 increase in market shares  Growth  Survival  innovation Prepared by William Armah for
 increase in market shares  Growth  Survival  innovation Prepared by William Armah for
 increase in market shares  Growth  Survival  innovation Prepared by William Armah for

Prepared by William Armah for www.warmah.com

 Shareholders  Employees  Management  Community  Customers  Environment  Government 

Shareholders

Employees

Management

Community

Customers

 Employees  Management  Community  Customers  Environment  Government  Supplier Prepared by
 Employees  Management  Community  Customers  Environment  Government  Supplier Prepared by
 Employees  Management  Community  Customers  Environment  Government  Supplier Prepared by

Environment

Government

Supplier

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 AGENCY RELATIONSHIP: A description of the relationship between management and shareholders expressing the idea

AGENCY RELATIONSHIP: A description of the relationship between management and shareholders expressing the idea that

managers act as agent for the shareholders,

using delegated power to run the company in the shareholders best interest.

using delegated power to run the company in the shareholders best interest. Prepared by William Armah
using delegated power to run the company in the shareholders best interest. Prepared by William Armah
using delegated power to run the company in the shareholders best interest. Prepared by William Armah

Prepared by William Armah for www.warmah.com

Issues where there may be conflict of interest between managers and shareholders are:  Information

Issues where there may be conflict of interest

between managers and shareholders are:

Information asymmetry

Rewards

Risk Takeover Time horizon

asymmetry  Rewards  Risk  Takeover  Time horizon Prepared by William Armah for www.warmah.com
asymmetry  Rewards  Risk  Takeover  Time horizon Prepared by William Armah for www.warmah.com
asymmetry  Rewards  Risk  Takeover  Time horizon Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

Value for money (VFM) this is also referred to as the 3E’s  Economy: lies

Value for money (VFM) this is also referred to

as the 3E’s

Economy: lies in operating at minimum cost.

Effectiveness: is achieving established objectives.

Efficiency: consist of attaining desired results at minimum cost. It therefore combines

effectiveness with economy.

results at minimum cost. It therefore combines effectiveness with economy. Prepared by William Armah for www.warmah.com
results at minimum cost. It therefore combines effectiveness with economy. Prepared by William Armah for www.warmah.com
results at minimum cost. It therefore combines effectiveness with economy. Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

These are financial institution, which links lenders (those with surplus funds) with borrowers (those with

These are financial institution, which links

lenders (those with surplus funds) with borrowers (those with deficit funds).

lenders (those with surplus funds) with borrowers (those with deficit funds). Prepared by William Armah for
lenders (those with surplus funds) with borrowers (those with deficit funds). Prepared by William Armah for
lenders (those with surplus funds) with borrowers (those with deficit funds). Prepared by William Armah for

Prepared by William Armah for www.warmah.com

 Convenience  Provision of funds to borrowers  Aggregation  Risk diversification  Diversified

Convenience

Provision of funds to borrowers

Aggregation

Risk diversification

Diversified portfolio

Maturity transformation

Risk diversification  Diversified portfolio  Maturity transformation Prepared by William Armah for www.warmah.com
Risk diversification  Diversified portfolio  Maturity transformation Prepared by William Armah for www.warmah.com
Risk diversification  Diversified portfolio  Maturity transformation Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

Financial markets are: market for buying and selling financial instrument Money (or bankers) market 

Financial markets are: market for buying and

selling financial instrument

Money (or bankers) market

Market for buying and selling short term financial instrument

Capital market

Market for buying and selling long-term financial instrument

market  Market for buying and selling long-term financial instrument Prepared by William Armah for www.warmah.com
market  Market for buying and selling long-term financial instrument Prepared by William Armah for www.warmah.com
market  Market for buying and selling long-term financial instrument Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

Examples of short-term financial instruments are:  Commercial paper (CP)  Certificate of deposit (CD)

Examples of short-term financial instruments

are:

Commercial paper (CP)

Certificate of deposit (CD)

Bills (government or local authority bills)

Term bill

deposit (CD)  Bills (government or local authority bills)  Term bill Prepared by William Armah
deposit (CD)  Bills (government or local authority bills)  Term bill Prepared by William Armah
deposit (CD)  Bills (government or local authority bills)  Term bill Prepared by William Armah

Prepared by William Armah for www.warmah.com

Examples of long-term financial instruments are:  Ordinary shares (equity)  Preference shares  Government

Examples of long-term financial instruments

are:

Ordinary shares (equity)

Preference shares

Government bonds

Corporate bonds:

Redeemable bond

Irredeemable bonds Convertible bonds

 Corporate bonds: Redeemable bond Irredeemable bonds Convertible bonds Prepared by William Armah for www.warmah.com
 Corporate bonds: Redeemable bond Irredeemable bonds Convertible bonds Prepared by William Armah for www.warmah.com
 Corporate bonds: Redeemable bond Irredeemable bonds Convertible bonds Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

 The international money market is referred to as: Euro currency market.  International capital

The international money market is referred to as:

Euro currency market.

International capital market is referred to as Euro bonds market and Euro equity market.

A Eurobond is a bond dominated in a currency that often differs from that of the country of issue.

Note that these international markets financial instruments should not be suggested as possible source of finance for smaller business.

should not be suggested as possible source of finance for smaller business. Prepared by William Armah
should not be suggested as possible source of finance for smaller business. Prepared by William Armah
should not be suggested as possible source of finance for smaller business. Prepared by William Armah

Prepared by William Armah for www.warmah.com

 Advantages of euro bonds  Suitable for large organization with excellent credit rating. 

Advantages of euro bonds

Suitable for large organization with excellent credit rating.

Its long term in nature.

Can be used to finance a big capital expansion programmed.

Borrowing is not subject to national exchange controls of any government.

Eurobond issues can be made whenever

market conditions seem favourable.

 Eurobond issues can be made whenever market conditions seem favourable. Prepared by William Armah for
 Eurobond issues can be made whenever market conditions seem favourable. Prepared by William Armah for
 Eurobond issues can be made whenever market conditions seem favourable. Prepared by William Armah for

Prepared by William Armah for www.warmah.com

 Interest rates are effectively the price governing lending and borrowing Factors affecting the rate

Interest rates are effectively the price governing

lending and borrowing

Factors affecting the rate of interest includes:

The term

Risk

The need to make profit on re-lending

Size of the loan or deposit:

 The need to make profit on re-lending  Size of the loan or deposit: Prepared
 The need to make profit on re-lending  Size of the loan or deposit: Prepared
 The need to make profit on re-lending  Size of the loan or deposit: Prepared

Prepared by William Armah for www.warmah.com

 A yield curve is a diagrammatic representation of the term structure of interest rates.

A yield curve is a diagrammatic representation of the term structure of interest rates.

Factors affecting the yield curve are:

Liquidity preference

Expectation

Market segmentation

are:  Liquidity preference  Expectation  Market segmentation Prepared by William Armah for www.warmah.com
are:  Liquidity preference  Expectation  Market segmentation Prepared by William Armah for www.warmah.com
are:  Liquidity preference  Expectation  Market segmentation Prepared by William Armah for www.warmah.com

Prepared by William Armah for www.warmah.com

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Recommend www.warmah.com to a friend.

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consultancy  Contact: info@warmah.com  Tel: +44 (0)7903960287 Prepared by William Armah for www.warmah.com
consultancy  Contact: info@warmah.com  Tel: +44 (0)7903960287 Prepared by William Armah for www.warmah.com
consultancy  Contact: info@warmah.com  Tel: +44 (0)7903960287 Prepared by William Armah for www.warmah.com

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