FINANCIAL MANAGEMENT
Objective: Maximising long term sustainable wealth
(Cost of financing < Return on investments)
FINANCING DECISIONS INVESTMENT DECISIONS
Objective: Obtaining funds with the minimum effective Objective: Investing in
cost sustainable projects with
maximum long term returns
Forms of equity finance Forms of loan finance/debt Investment opportunities
-Issued share capital -Debentures -Capital assets
-Retained income -Mortgage bonds -Replacement of assets
-Preference shares -Long term loans -Mergers
(Convertible) -Instalment sale -Acquisitions
-Lease finance -Restructuring
-Preference shares (not
convertible)
Techniques: Techniques:
-Effective cost of finance -Time value of money
-Time value of money -Capital budgeting
-Valuation methods
, 3
Goal of an entity
, 4
1. Shareholders wealth maximisation
In the 1990’s business entities often cited their main goal as maximising of shareholders
wealth, and it became common for company boards to focus on shareholder value, thereby
maximising returns to shareholders. This goal encourages short-term thinking and a bias
towards certain stakeholder groupings at the expense of others.
Business entities today face a global environment. It has therefore become appropriate and
necessary that entities today pursue goals that result in the long-term sustainability of the
entity, instead of focusing on short-term business gains/profits that are gained at the
expense of harm being done to people and planet.
2. Stakeholder theory/framework/approach
The stakeholder theory has laid the foundation for explaining the relationships between business
and its stakeholders other than shareholders, and for explaining that an entity may choose to satisfy
objectives other than economic objectives.
Other emerging perspectives on the purpose and goal of a business entity in modern society include
the stewardship model and conscious capitalism.
According to the stewardship model, the purpose and role of business is to serve by contributing to
the advancement of humankind. Profit is not identified as a purpose but as an outcome and there is
a strong emphasis on corporate responsibility and business ethics centered on doing business
virtuously by acting as stewards.
Conscious capitalism embodies the idea that profit and prosperity go hand in hand with social justice
and environmental stewardship, and entities that practice conscious capitalism have a higher
purpose than maximization of shareholder returns. Society is seen as the ultimate stakeholders, and
profit is viewed as a natural outcome flowing from doing the right things.
Business model or value creation model of an entity
Entities can describe the manner in which value is created for shareholders and major stakeholders
by their business model, or value creation model. Value can only be created for stakeholders if the
entity has a clear strategy that takes the external and internal business environment as well as the
role and needs of each of the stakeholder groups of the entity into consideration.
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