Strategic Financial Management
Overview of the objectives of strategic financial management
What is financial management?
That part of management accounting concerned with setting financial objectives, planning and acquiring the optimum finance to meet them, and seeing that fixed and working capital are effectively managed.' (CIMA).
Two fundamental questions: 1. What investments should a firm make?
Long term investments are referred to as capital investment projects'
e.g. build a new supermarket or factory. 2. How should the firm pay for those investments?
Sources of finance, i.e. where should the money come from? o e.g. Should the supermarket or factory be financed by borrowing money from the bank? Diagrammatic overview of a public limited company
Stakeholder:
A party with an interest in an organisation (Arnold, p.7)
Learning activity:
1) Who are the main stakeholders in Tesco plc?
2) Who are the most important ones and why?
The primary objective of strategic financial management
A company should make investment and financing decisions with the aim of maximising shareholder wealth.
Other possible financial objectives:
Maximise profits
Maximise sales
Survival
Social responsibility
Agency theory
"Theory of the relationship between a principal, e.g. a shareholder, and an agent of the principal, e.g., the company's manager." (BMA, p.995)
Key issues:
Divergence of ownership and control
The goals of the managers (agents) differ from those of the shareholders (principals) o What will managers wish to maximise?
The risk attitude of managers may differ from that of the shareholders
Asymmetry of information
Agency costs: "The direct and indirect costs of attempting to ensure that agents act in the best interest of principals as well as the loss resulting from failure to get them to act this way." (Arnold, p.983)
Sources of Finance
Internal v external sources
Internal
Funds available from within the company.
What is financial management?
That part of management accounting concerned with setting financial objectives, planning and acquiring the optimum finance to meet them, and seeing that fixed and working capital are effectively managed.' (CIMA).
Two fundamental questions: 1. What investments should a firm make?
Long term investments are referred to as capital investment projects'
e.g. build a new supermarket or factory. 2. How should the firm pay for those investments?
Sources of finance, i.e. where should the money come from? o e.g. Should the supermarket or factory be financed by borrowing money from the bank? Diagrammatic overview of a public limited company
Stakeholder:
A party with an interest in an organisation (Arnold, p.7)
Learning activity:
1) Who are the main stakeholders in Tesco plc?
2) Who are the most important ones and why?
The primary objective of strategic financial management
A company should make investment and financing decisions with the aim of maximising shareholder wealth.
Other possible financial objectives:
Maximise profits
Maximise sales
Survival
Social responsibility
Agency theory
"Theory of the relationship between a principal, e.g. a shareholder, and an agent of the principal, e.g., the company's manager." (BMA, p.995)
Key issues:
Divergence of ownership and control
The goals of the managers (agents) differ from those of the shareholders (principals) o What will managers wish to maximise?
The risk attitude of managers may differ from that of the shareholders
Asymmetry of information
Agency costs: "The direct and indirect costs of attempting to ensure that agents act in the best interest of principals as well as the loss resulting from failure to get them to act this way." (Arnold, p.983)
Sources of Finance
Internal v external sources
Internal
Funds available from within the company.