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Function of Financial Management and Financial Accounting in the Health and Fitness Sector. FINANCE. Finance is about managing money. Think of setting up a business – business plan – how much cash you will need to finance the business.
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Function of Financial Management and Financial Accounting in the Health and Fitness Sector
FINANCE • Finance is about managing money. • Think of setting up a business – business plan – how much cash you will need to finance the business. • This is the budgeting process, which involves assessing the firm’s long- term investment projects.
Investment Decisions • What assets should the business acquire • What business lines are profitable • Which assets the business should eliminate • How large should the business grow and how should it be achieved
Financing Decisions • How will the assets that the business needs be financed • What is the best type of financing – equity/debt, long or short term • If the issue of shares is used for finance requirements what would be the best dividend policy
Asset Management • Important to manage the use of existing assets effectively • Financial managers have varying degrees of responsibility over assets • The management of current assets will be more important than non current assets.
Goal of the firm • Often assumed that the objective of commerical entities is : To Maximise The Value Of the Firm Or To Maximise The Wealth Of The Shareholders • In reality, firms have multiple, and often conflicting, objectives and will seek to optimise among those. The modern corporation is a complex entity which is responsible not only to shareholders but to all stakeholders. The main stakeholders are:
Stakeholders • Shareholders • Loan Creditors – security, repayment of loan interest and principal. • Employees – fair wages, welfare & social facilities = improved motivation. • Management – job security, fair reward, job satisfaction • Trade Creditors – payment within credit terms
Stakeholders 6. The Community – sponsorship; charities; environmental measures. • The Government – payment of taxes • The Customers – provision of service/goods at fair price; quality; on time, etc.
Risks • What are the risks associated with this goal • If Financial Managers are rewarded based on profits they could be tempted to over state profits • Profits may be increase while risking the overall firm, for example reducing advertising spent to save money may in the long term cause the loss of market share.
Agency Theory • In today’s companies day-to-day management is carried out by directors. Shareholders (the owners) rely on directors to manage the assets to shareholder benefit. • The managers/directors act as agents for the shareholders (owners) in running the company. This separation of ownership from control may lead to certain problems if managers are not monitored or constrained – e.g. management working inefficiently; adopting risk adverse policies such as ‘safe’ short-term investments.
Agency Theory Managers’ and shareholders’ interests can be aligned by a number of measure – introducing profit-related remuneration for management; offering bonus shares; share option schemes; scrutiny of performance by the board of directors and banks who provide finance, etc. However, care must be taken to ensure that management does not take action to boost performance in the short-term to the detriment of the long-term wealth of the shareholders (‘short termism’).
Nationalised Industries/Public Sector The objectives of nationalised industries are likely to be strongly influenced by the government and not primarily financial. These organisations exist to provide a service (e.g. An Post, Health Boards etc) and to ensure that social needs are satisfied and financial requirements may be seen as constraints and not objectives. They are not usually profit maximising, although subsidiary objectives may be concerned with earning an acceptable return on capital employed.
Impact of Government Activities Taxation – Corporate (Capital Allowance) & Personal (BES, Designated Property etc) Monetary Policy – Inflation, Interest Rates, Exchange Rates, etc Investment Incentives – Grants, IDA support, Leader support Legislation – Monopolies, Competition, Environmental Wage Controls Duties, Tariffs
Financial Planning • Financial planning involves the conversion of the corporate plan into quantitative terms. This will involve projected financial statements that show the effect the corporate plan has on corporate profits. • The financial plan will involve projected financial statements that analyse the effect the corporate plan will have on projected profits. A strategic corporate plan ensures: • Money needed for investment purposes will be available. This will include money needed for fixed assets, stock, debtors, research and development
FINANCE • Financial planning will allow for unexpected changes in economic conditions in which the plan is based. Forecasting is important because business decisions are based on forecasts of expected and unexpected situations that a business will be exposed to in the future. Sensitivity analysis deals with unexpected events occurring by factoring in different scenarios like changes in interest rates, currency fluctuations and domestic or international demand side shocks to the economy. Failure to anticipate future events can have devastating effects on company performance.
CASH MANAGEMENT • Cash is an idle asset. • Company should try to hold the minimum sufficient for its needs. • Three motives for holding liquid funds (cash, bank deposits, short-term investments) Transaction Motive – to meet payments in ordinary course of business – employees, suppliers etc. Depends upon type of business, seasonality of trade, etc.
Cash Management and Budgeting • In later lectures we will learn the importance of budgeting in relation to cash management. • It is as important not to run out of cash as to have cash not working for the business.
