FINANCIAL MATHEMATICS

UNIT 1

Introduction to Financial Management

Learning Outcomes
• Explain and appraise the context within which the financial management
function takes place; and
• Compare the roles of cost accounting, management accounting and
financial accounting in a business environment.

Footnote Introduction to Financial Management 2

1.2 Financial Management
• Financial management can be described as a process of creating value in an
organisation.
• The process consists of planning, organising, directing and controlling the financial
activities of a business.
• Value is created when the wealth of the owner/s of a business increases over time
(i.e. creating value in the future).
• Financial management is also linked to economics as financial managers must
make decisions in a constantly changing economic environment.

Footnote Introduction to Financial Management 3

Accounting
• Accounting can be described as being concerned with:
• Measurement; and
• Management.
• Measurement is largely concerned with recording past data.
• Management is concerned with the use of that data in order to make decisions
that benefit an entity.

Footnote Introduction to Financial Management 4

Financial Accounting
• The objective of financial accounting is:
• to provide information that is useful for external users to make decisions relating to their
investment in a particular entity and to analyse how the entity is performing.
• The main purpose is for external reporting.
• Financial accounting is backward looking (i.e. reporting on historical transactions).

Footnote Introduction to Financial Management 5

Cost Accounting
• Cost accounting developed out of the need for financial information as required by
the financial accountant and looks at gathering and analysing costs for the
purpose of:
• Product costing;
• Job costing; and
• Stock valuation.
• The main purpose is for internal reporting.

Footnote Introduction to Financial Management 6

Management Accounting
• Management accounting refers to information gathering for internal decision
making purposes.
• Management accounting is forward looking (i.e. involved in planning and control to
assist in decision-making of an entity).

Footnote Introduction to Financial Management 7

Comparisons
Financial Accounting External reporting (IFRS)

Cost Accounting Internal reporting

Planning

Management Accounting

Control

Financial Management Creating future value

Footnote Introduction to Financial Management 8

1.3 Financial Manager
• The financial manager is responsible for an organisation’s financial management
activities, such as;
• Capital budgeting (i.e. investment decisions);
• Capital structure (i.e. financing decisions);
• Working capital management (i.e. investment and financing decisions); and
• Dividend decisions.

Footnote Introduction to Financial Management 9

Overview of Financial Management
Maximisation of shareholder wealth

Investment Financing Dividend

decision decision decision

 The financial manager must decide on:

– Internal investments (to enhance internal growth);
– External investments (via acquisitions); and
– Disinvestments (withdraw from unsuccessful projects).

Footnote Introduction to Financial Management 10

Overview of Financial Management
Maximisation of shareholder wealth

Investment Financing Dividend

decision decision decision

 The financial manager must possess knowledge of:

– Sources of finance and their respective cost;
– Capital structure (balance between debt and equity);
– The difference between profit and cash flow.

Footnote Introduction to Financial Management 11

Overview of Financial Management
Maximisation of shareholder wealth

Investment Financing Dividend

decision decision decision

 Dividend decisions relate to the determination of:

– How much and how frequently cash can be paid out;
– How much should be retained to support growth.

Footnote Introduction to Financial Management 12

1.4 Goals of Financial Management
• Goals (objectives) of financial management include:
• Profit maximisation;
• Maximising the rate of return; and
• Maximising shareholders’ return.

Footnote Introduction to Financial Management 13

1.5 Forms of Businesses in SA
• Unlimited liability:
• Sole trader;
• Partnership;
• Personal liability company
• Limited liability:
• Not-for profit companies
• Private company – (Pty) Ltd
• Public company – Ltd
• Listed on the stock exchange
• Not listed on the stock exchange
• State-owned enterprise (SOC Ltd)
• Close corporation – CC
• No new registrations

Footnote Introduction to Financial Management 14

Stakeholders

Local Communities
Pressure Groups External
Government
Connected
Shareholders
Customers
Suppliers
Internal
Bankers

Managers
Employees

Footnote Introduction to Financial Management 15

Stakeholders
• The various stakeholders have different interests, namely:
• Shareholders – wealth maximisation
• Suppliers – paid amount owed in full by due date
• Lenders – repayment of capital and interest
• Employees – continuity of employment & salary
• Government – economic growth, employment levels and taxes
due
• Customers – continuous trading relationship
• General Public – pollution and social responsibility, etc.

Footnote Introduction to Financial Management 16

1.6 Agency Theory
• A possible conflict can arise when ownership is separated from the day-to-
day management.
• Agency relationship
• Relationship between management and shareholders. Management act as agents
for the shareholders (principals) and should run the organisation in the
shareholders’ best interests.
• Agency problem
• A conflict may exist between the actions undertaken by agents in furtherance of
their own self-interest, and those required to promote the interests of the
principals.

Footnote Introduction to Financial Management 17

1.7 Financial Markets
• Financial Markets
• Money markets
• Capital markets
• Primary and secondary markets
• Auction markets
• Dealer markets
• Financial Institutions
• Banks, etc.

Footnote Introduction to Financial Management 18

1.8 Business Ethics & Governance
• Business Ethics
• Good corporate citizens
• CIMA Code of Ethics
• Impact on profitability
• Corporate Governance
• Equitable treatment of shareholders;
• Consideration of the interest of all stakeholders;
• Roles and responsibilities of the board;
• Integrity and ethical behaviour; and
• Disclosure and transparency.
• King IV issue in South Africa in 2016
• Follows 17 principles

Footnote Introduction to Financial Management 19

QUESTIONS?