CHAPTER 1

THE FINANCIAL
MANAGEMENT FUNCTION
 ACQUISITION UTILIZATION

FUNCTIONS

INVESTMENT DECISIONS Long term and short term investments – NCA AND WC

FINANCING DECISIONS Source of finance

DIVIDEND DECISIONS Distribution & retention of profits

 OBJECTIVES

MARKET
SHARE

SHAREHOLDERS’ WEALTH SOCIAL

PROFIT
MAXIMIZATION MAXIMISATION RESPONSIBILITIES

EMPLOYEE
SATISFACTION
 STAKEHOLDERS

SHAREHOLDERS Share price maximization, dividend, earnings growth

EMPLOYEES Maximize remuneration, job security, career development

DIRECTORS Maximise remuneration, maximize power and influence

CUSTOMERS High quality, reliable service, innovation

LENDERS Certainty of payment, security

SUPPLIERS Certainty of payment, further business

GOVT. Tax, employment

 AGENCY THEORY
Shareholders – Owners ; Directors - Agent

AGENCY CONFLICT
Directors may act in their own best interest

CORPORATE GOVERNANCE &

SHARE OPTIONS &
STOCK EXCHANGE LISTING
PERFORMANCE RELATED PAY
REQUIREMENTS
 NOT FOR PROFIT ORGANISATION

MULTIPLE & CONFLICTING DIFFICULT TO QUANTIFY

OBJECTIVES OBJECTIVES

VALUE FOR MONEY

ECONOMY EFFICIENCY

EFFECTIVENESS
 RATIOS

Measure the efficiency in generating

1. ROCE – PBIT/TALCL profit from capital employed

2.GROSS PROFIT MARGIN Measure the ability to sell goods for more
– GP/REVENUE than they cost to make

3.NET PROFIT MARGIN Measure the ability to make overall profit

on goods sold
- NP/REVENUE
ASSET TURNOVER – Measure how efficiently a Co. uses its
REVENUE/CAPITAL assets to generate sales
EMPLOYED
 TOTAL SHAREHOLDER Measure the total return for the
RETURN(TSR) shareholders

Dividend + change in price /

Price at the start of the year

EARNINGS PER SHARE(EPS) Amount of earnings Co. has generated for

the shareholders on each share they hold

PAT / No: of shares

P/E RATIO What is the growth prospects? High P/E

suggest high growth

Market share price / EPS