FINANCIAL MANAGEMENT Presented by Nijat Abbasli

STRUCTURE OF THE COURSE

Financial management and financial Working capital finance

objectives
Investment decisions
The economic environment for Investment appraisal using DCF
business methods
Financial markets, money markets
Allowing for inflation and taxation
and institutions
Project appraisal and risk
Working capital
Managing working capital
STRUCTURE OF THE COURSE
Specific investment decisions Capital structure
Sources of finance Business valuations
Dividend policy Market efficiency
Gearing and capital structure Foreign currency risk
The cost of capital Interest rate risk
 CHAPTER 2: THE ECONOMIC ENVIRONMENT FOR BUSINESS
Outline of macroeconomic policy
Fiscal policy
Monetary policy
Exchange rates
Competition policy
Government assistance for business
Green policies
Corporate governance regulation
MICROECONOMICS, MACROECONOMICS AND
ECONOMIC POLICY
Microeconomics is concerned with the economic behaviour of individual firms and
consumers or households.
Macroeconomics is concerned with the economy at large, and with the behaviour of
large aggregates such as the national income, the money supply and the level of
employment.
ECONOMIC POLICIES AND OBJECTIVES
 ECONOMIC OBJECTIVES
(a) Economic growth
'Growth' implies an increase in national income in 'real' terms (increases caused by price
inflation are not real increases at all). It is usually interpreted as a rising standard of
living.
(b) Control price inflation
This means managing price inflation to a low, stable level. Inflation is viewed as a
problem because, if a country has a higher rate of inflation than its major trading
partners, its exports will become relatively expensive. It leads to a redistribution of
income and wealth in ways which may be undesirable. In times of high inflation,
substantial labor time is spent on planning and implementing price changes.
 ECONOMIC OBJECTIVES
(c) Full employment
Full employment does not mean that everyone who wants a job has one all the time, but
it does mean that unemployment levels are low, and involuntary unemployment is short
term.
(d) Balance of payments stability
The wealth of a country relative to others, a country's creditworthiness as a borrower, and
the goodwill between countries in international relations might all depend on the
achievement of an external trade balance over time. Deficits in external trade, with
imports exceeding exports, might also be damaging for the prospects of economic
growth.
ECONOMIC POLICIES
(a) Monetary policy: Monetary policy aims to influence monetary variables such as the
rate of interest and the money supply in order to achieve targets set for employment,
inflation, economic growth and the balance of payments.
(b) Fiscal policy: Fiscal policy involves using government spending and taxation in order
to influence aggregate demand in the economy.
(c) Exchange rate policy: Some economists argue that economic objectives can be
achieved through management of the exchange rate by the Government. The strength or
weakness of sterling's value, for example, will influence the volume of UK imports and
exports, the balance of payments and interest rates.
(d) External trade policy: A government might have a policy for promoting economic
growth by stimulatin exports; for example, by managing the exchange rate to make
exports cheaper for foreign purchasers. Another argument is that there should be import
controls to provide some form of protection for domestic manufacturing industries by
making the cost of imports higher and the volume of imports lower. Protection could
encourage domestic output to rise, stimulating the domestic economy.
 CONFLICTS IN POLICY OBJECTIVES AND
INSTRUMENTS
(a) There may be a conflict between steady balanced growth in the economy and full
employment. Although a growing economy should be able to provide more jobs, there is
some concern that since an economy must be modernised to grow and modern technology is
labour saving, it might be possible to achieve growth without creating many more jobs, and
so keeping unemployment at a high level.
(b) In the UK, problems with creating more employment and steady growth in the economy
have been a lack of domestic and global demand following the global financial crisis, the
balance of payments, the foreign exchange value of sterling, inflation and the money supply.
The objectives of lower unemployment and economic growth have been difficult to achieve
because of the problems and conflicts with secondary objectives.
 CONFLICTS IN POLICY OBJECTIVES AND
INSTRUMENTS
(i) To create jobs and growth, there must be an increase in aggregate demand. When
demand picks up there will be a surge in imports, with foreign goods bought by UK
manufacturers (eg raw materials) and consumers.
(ii) For example, in the UK, the high rate of imports creates a deficit in the balance of
payments, which in turn will weaken sterling and raise the cost of imports, thus giving some
impetus to price rises.
(iii) To maintain the value of a country's currency, interest rates might need to be kept high,
and high interest rates appear to deter companies from investing.
PROBLEMS WITH POLICIES
Inadequate information
Time lags between use of policy and effects being noticeable
Political pressure for short-term solutions
Unpredictable side effects of policies
The influence of other countries
Conflict between policy instruments
 FISCAL POLICY
Fiscal policy seeks to influence the economy by managing the amounts which the Government
spends and the amounts it collects through taxation. Fiscal policy can be used as an instrument of
demand management.
FISCAL POLICY AND BUSINESS
MONETARY POLICY
THE ROLE AND AIMS OF MONETARY POLICY
 TARGETS OF MONETARY POLICY
Targets of monetary policy are likely to relate to the volume of national
income and expenditure.
Growth in the size of the money supply
The level of interest rates
The volume of credit, or growth in the volume of credit
The volume of expenditure in the economy (ie national income or gross
national product (GNP) itself)
MONETARY POLICY TOOLS
Main actor of monetary policy is Central Bank
Tools for monetary policy:
- Open market operations
- Discount rate
- Required reserves
EXCHANGE RATES
FACTORS INFLUENCING THE EXCHANGE RATE FOR
A CURRENCY
 CONSEQUENCES OF AN EXCHANGE RATE POLICY
Reasons for a policy of controlling the exchange rate are as follows.
(a) To rectify a balance of trade deficit, by trying to bring about a fall in the
exchange rate
(b) To prevent a balance of trade surplus from getting too large, by trying to
bring about a limited rise in the exchange rate
(c) To stabilise the exchange rate of the currency, as exporters and importers
will then face less risk of exchange rate movements wiping out their profits; a
stable currency increases confidence in the currency and promotes
international trade.
EXCHANGE RATES AND BUSINESS
Thank you 