FINM6221 LU1
FINM6221 LU1 – IFRS and Conceptual
framework
1.1Introduction
Purpose of the financial management – initiate, consider and manage areas of financing on
behalf of a business
1.2 The objectives of a business
Objective of a business/ financial manager = maximize shareholder wealth
Difference between profit maximization and shareholder wealth maximization!
Profit maximization = maxing the bottom line (profit for the year)
- Measured by the earnings per share – EPS
- EPS does not take into consideration the timing of cash flows (when accrued profits
will be received by the business) or any risk to the business (actual outcomes differ
from the expected outcome)
Shareholder wealth maximization
- measured with reference to the business’s current share price
- share price takes the market’s expectation of the timing and magnitude of cash flows
and risks into consideration.
EPS is a good indicator of a business’s future returns therefore there is a correlation btwn
EPS and share price.
Financial managers key objective – consider only projects/decisions that will have a positive
effect on the business’s share price.
Drawbacks of profit maximization:
- Accounting profits don't always translate into cash inflows, which concerns
shareholders and creditors.
- Ignores the time value of money by not discounting future cash flows.
- Profits can be manipulated through creative accounting (e.g., overstating revenue or
understating costs).
- Does not consider risk, meaning high profits may come from high-risk investments.
- Encourages short-term decision-making, which may harm long-term company growth
(e.g., cutting labor costs).
, FINM6221 LU1
1.3 The role of the financial manager
The financial manager handles the monetary affairs of the business
Main focuses:
- Acquisition
- Financing to maximise wealth of shareholders
- Management of assets
Primary responsibilities common to all financial managers:
- Financial planning and analysis (FP&A)
- Investment decisions
- Financing decisions
Other responsibilities can include:
- Cash management
- Relationship management
- Dividend decisions
- Risk management
1.3.1 Financial planning & analysis
Comprises of:
Forecasting and budgets
This indicates what the business’s capital/funding requirements will be in the immediate and
in the long term
Financial forecasts & budget help the financial manager:
- Evaluate available funds and future funding needs.
- Identify key factors driving sales and profit growth.
- Assess financial risks and economic conditions.
- Determine capital investment requirements.
- Plan for future commitments and resource demands.
- Compare actual performance to benchmarks for accountability.
In a forecast, the financial manager will use past financial info to predict what will happen in
the next few months. These are produced 3 times a year and are concerned with the current
financial year
- Forecast 1 (3 months in): 3 months actual, 9 months projected.
- Forecast 2 (6 months in): 6 months actual, 6 months projected.
- Forecast 3 (9 months in): 9 months actual, 3 months projected.
Budget = financial plan of the financial year immediately following the current year. Predicts
the expected cash flows of that year. Prepared once a year – last quarter of the financial
year for the next financial year.
FINM6221 LU1 – IFRS and Conceptual
framework
1.1Introduction
Purpose of the financial management – initiate, consider and manage areas of financing on
behalf of a business
1.2 The objectives of a business
Objective of a business/ financial manager = maximize shareholder wealth
Difference between profit maximization and shareholder wealth maximization!
Profit maximization = maxing the bottom line (profit for the year)
- Measured by the earnings per share – EPS
- EPS does not take into consideration the timing of cash flows (when accrued profits
will be received by the business) or any risk to the business (actual outcomes differ
from the expected outcome)
Shareholder wealth maximization
- measured with reference to the business’s current share price
- share price takes the market’s expectation of the timing and magnitude of cash flows
and risks into consideration.
EPS is a good indicator of a business’s future returns therefore there is a correlation btwn
EPS and share price.
Financial managers key objective – consider only projects/decisions that will have a positive
effect on the business’s share price.
Drawbacks of profit maximization:
- Accounting profits don't always translate into cash inflows, which concerns
shareholders and creditors.
- Ignores the time value of money by not discounting future cash flows.
- Profits can be manipulated through creative accounting (e.g., overstating revenue or
understating costs).
- Does not consider risk, meaning high profits may come from high-risk investments.
- Encourages short-term decision-making, which may harm long-term company growth
(e.g., cutting labor costs).
, FINM6221 LU1
1.3 The role of the financial manager
The financial manager handles the monetary affairs of the business
Main focuses:
- Acquisition
- Financing to maximise wealth of shareholders
- Management of assets
Primary responsibilities common to all financial managers:
- Financial planning and analysis (FP&A)
- Investment decisions
- Financing decisions
Other responsibilities can include:
- Cash management
- Relationship management
- Dividend decisions
- Risk management
1.3.1 Financial planning & analysis
Comprises of:
Forecasting and budgets
This indicates what the business’s capital/funding requirements will be in the immediate and
in the long term
Financial forecasts & budget help the financial manager:
- Evaluate available funds and future funding needs.
- Identify key factors driving sales and profit growth.
- Assess financial risks and economic conditions.
- Determine capital investment requirements.
- Plan for future commitments and resource demands.
- Compare actual performance to benchmarks for accountability.
In a forecast, the financial manager will use past financial info to predict what will happen in
the next few months. These are produced 3 times a year and are concerned with the current
financial year
- Forecast 1 (3 months in): 3 months actual, 9 months projected.
- Forecast 2 (6 months in): 6 months actual, 6 months projected.
- Forecast 3 (9 months in): 9 months actual, 3 months projected.
Budget = financial plan of the financial year immediately following the current year. Predicts
the expected cash flows of that year. Prepared once a year – last quarter of the financial
year for the next financial year.
