The nature & purpose of financial management
The accounting field has many branches and aspects that focus on different financial information. The Management accountant is concerned with planning, controlling and decision-making activities such as forecasting and variance analysis. Financial accountants focus on providing information that will be used externally, for example keeping shareholders aware of the overall financial position of the business through financial statements.
Financial managers will focus on the management of finance to achieve the financial objectives of the organisation. In a commercial, for-profit organisation this would normally include maximising the shareholders wealth however all types of organisation must pay close attention to whether they have enough cash reserves to continue to provide goods and services to its clients.
The three key decisions they make are in:
- Raising finance – The financing mix of capital structure with efforts focused on obtaining an optimal finance mix and ensuring enough funds are available for short (eg Working capital), medium and long-term (eg Non-current assets).
- Investment decisions – Investment Appraisal, Risk and Working Capital Management
- Dividend Policy – Dividend payout ratio considering valuation methods and efficient markets.
Measuring Corporate Objectives
Financial managers develop financial strategies in order to achieve the financial/corporate objectives of the organisation.
The corporate objectives are concerned with the business as a whole and can be measured through the use of financial performance ratios, they can be categorised as:
- Profitability and Return- ROCE, ROE, Asset turnover and Gross profit, Net profit.
- Debt and Gearing- Gearing Ratios.
- Liquidity- Quick and Acid-test Ratios.
- Stock Market Ratios- Dividend Yield, Dividend cover, P/E ratio and EPS.