STUDY UNIT 2.1: INTRODUCTION TO FINANCIAL MANAGEMENT
Specific outcomes:
You must be able to use appropriate or accepted techniques in order to provide
management with information that can be used to implement proper system of financial
management.
This financial management system is used to effectively manage financial matters of
entity, including provision of information that would enable management to take
decisions that have financial implications for business.
Evaluation criteria:
Explain what financial management is.
Discuss goals of financial management and implication of strategic financial management,
including:
Different forms of business organisations,
Environmental factors,
Efficiency of markets,
Socio-economic conditions, and
Agency factors.
Distinguish between role of financial accountant and financial manager/ management
accountant.
Compare cost versus benefit of information.
Distinguish between financial and non-financial information.
Discuss special factors that have impact on management information that entity in service
sector would require.
Introduction:
This text discusses financial management of business enterprises, focusing on two major
decisions: investing in assets that increase firm's value and raising capital through new
equity, retained earnings, or debt.
These decisions are crucial for firm's success and growth.
Financial managers make decisions in line with firm's strategic vision and core values,
ensuring success of investment and use of funds.
Created in Effie (Trial)
,Context of Financial Management:
Financial management, applied discipline, is based on economics and accounting, and is
applied to all types of business enterprises, with listed companies being most suitable for
developing principles.
Development of financial management:
Financial matters have been handled for centuries, with development of companies
separating ownership from management and ensuring business continuity.
Limited liability investments allowed for large capital pooling, securities exchanges
allowed for share trading, and advances in technology and information systems
have facilitated market reactions.
Finance theory, developed since 1950s, guides management in optimizing investing
and financing decisions.
Links with economics:
Financial management is crucial aspect of corporate finance, requiring deep
understanding of economic principles and interaction of economic forces.
It involves analyzing economic indicators like GDP, balance of payments, exchange
rates, inflation, employment figures, and interest rates.
Primary objective is to maximize use of scarce resources, with financial capital being
key resource.
Financial manager is responsible for optimizing this resource.
Links with accounting:
In South Africa, listed companies are required to produce Integrated Report and
financial statements in accordance with International Financial Reporting Standards
(IFRS).
Integrated Report provides information about company's strategy, risk
management policies, governance, and management of six capitals:
Financial capital:
Funds available to organization for production or service provision,
obtained through financing, operations, or investments, can be used
for goods or services.
Intellectual capital:
Created in Effie (Trial)
, Organisational intangibles encompass intellectual property,
organisational capital, and brand and reputation-related intangibles,
including patents, copyrights, and procedures.
Human capital:
People's competencies, capabilities, and motivations to innovate are
crucial for organization.
They align with governance frameworks, risk management, ethical
values, and strategy implementation.
They also have loyalty and motivations to improve processes, goods,
and services.
Natural capital:
Natural capital encompasses all renewable and non-renewable
environmental stocks that support organization's current and future
prosperity, including air, water, land, forests, minerals, biodiversity, and
ecosystem health.
Social and relationship capital:
Social and relationship capital refers to institutions and relationships
within communities, stakeholders, and networks that enhance
individual and collective well-being.
It includes shared norms, common values, key relationships, trust, and
organization's social license to operate, which includes approval from
regulators, risk management, and governance practices.
Manufactured capital:
Manufactured capital refers to physical objects produced by
organization for use in production or service provision, such as
buildings, machinery, and infrastructure.
It can be created by other organizations or retained by reporting
organization for its own use.
This information is used by investors to value company's shares.
However, accounting information has limitations, particularly in its historic
perspective.
Created in Effie (Trial)
