Session 1: Evolution of Finance Management

• Introducing financial management to the learners
• Outlining the role of finance staff in an enterprise
• Explain to the participants on the objectives of companies

• Finance management

1. What percentage of funds needed by the business should be obtained from borrowing and what percentage should be sourced from the owners?
2. What percentage of the annual profits should be paid out to shareholders as dividends?
3. Is it worth while for the enterprise to replace its manufacturing machine with a computer-integrated system?
4. Should we allow more payable days to the customers?
5. How can the deteriorating gearing level of an enterprise be improved?

1. Investment decision
   • Allocation of capital to investment proposals
   • Managing existing investments efficiently
2. Financing
   • Determining the best mix of capital structure
   • Methods of obtaining long and short-term finance.
3. Dividend decisions
   • Percentage of earnings to stockholders
   • Stability of absolute dividend
   • Stock dividend and splits

• Forecasting and planning
  Finance staff should be able to coordinate activities of various departments within the business and be able to forecast both the short and long term requirements of these departments. Finance staff should be open-minded to take into account factors which may affect the future prospects of the business.
• Appraising investment activities
  Business need to expand but unplanned expansion programme lead to over capitalisation. Non current assets are underutilised and usually resulting in dormant assets laying idle. Finance managers have the responsibility to assess the viability of any capital investment undertaken by an enterprise. Only those projects which will add value to the business should be undertaken. Financial managers should ensure that the enterprise is not lacking behind in innovation. They are also supposed to advice the management team on the business financing form for a capital project.
• Coordination and control
  To satisfy the needs of various stake holders, finance management staff should ensure efficient utilisation of resources. The activities of various departments should be coordinate to avoid sub optimisation of various departments. Without coordination there will be competition within the business on scarce resources. For example if the purchasing department purchase from a cheaper source it will improve its budgetary position but may be the quality may not be that good and will result in poor performance for the manufacturing department.
• Decision on finance market
  The financial staffs are required to source funds for the enterprise as they are supposed to have a wider knowledge on financial market. The finance staffs will advice the firm on both short and long term sources of finance. They are supposed to consider both cost and the financial position of the business before embarking on any financial market. With growing in international trade, finance managers need to introduce the firm to both local and international source of finance. They are supposed to compare the rates levels in different markets but also consider products available on these international markets.
• Risk management
  Finance staff needs to assess all the risk which the business face and make pre arranged efforts to minimise or if possible eliminate these risk. The risk may include political risk which can be minimised by investing in countries with stable democracies, foreign currency risk by entering into forward rates with the banks, natural or human induced disaster which can be reduced by obtaining an insurance cover.
• Performance measurement
  Financial staffs should appraise the performance of the enterprise as a whole and also its departments. The staff should compare the targets set for the enterprise and the actual performance achieved. In broad terms, financial management staff should construct a framework which one can be able to establish the meaningful interrelationship on:
  1. The financial goals of the company;
  2. The valuation of the company;
  3. The means of measuring the performance of the company – when its goals have been identified and method of valuation chosen, the company performance must be assessed and measured.

1. Maximising stock holders’ wealth
   Objectives of organisations will be heavily influenced by the ‘coalition’ or stakeholder groups that have the most power. The theory of company finance is based on the assumption that the objective of management is to maximise the market value of the company’s shares. A company is financed by the shareholders, loan stock holders and other long term and short term creditors. Profit or cash flow generated by the business need to be shared by these stakeholders. All surplus funds however belong to the legal owner of the business, its ordinary shareholders. These are stakeholders who are subordinate to all other classes of stakeholders as they will always be the last in distribution of funds as dividend or sharing of liquidation proceeds. Any retained profits are undistributed wealth of these shareholders and management is directly answerable to them because they are the ones who appointed them and have powers to remove them.
2. Other financial objectives
   • Achieving a target market share.
     The enterprise will set objective to be the market leader or maintain its market stand. The reason behind this objective is that performance of the enterprise depends on being able to retain market share but also be able to capture other new customers.
   • Survival
     Where competition is stiff the firm may set as its objective to survive. The firm may employ such tactics like maintaining a market niche, intensifying on barriers to entry into the industry it is operating but also choosing non growth strategy to ensure that they are able to stick to what they know.
   • Maximising the profits
     This is a complementary objective to above primary objective, because maximisation of shareholders requires the business to generate more profits. Maximisation of profits will increase the market value of the business thereby increasing the shareholders fund.
3. Non Financial Objectives
   • Provide welfare of employees
     A company might try to provide good wages and salaries, comfortable and safe working conditions, good training and career development, and good pensions. If redundancies are necessary, many companies will provide generous redundancy payments or spend money trying to find alternative employment for redundant staff.
   • Welfare of management
     Managers will often take decisions to improve their own circumstances, even though their decision will incur expenditure and so reduce the profits. High salaries, company cars and other perks are all examples of managers promoting their own interests.
   • Welfare of society as a whole
     The management of some companies are aware of the role that their company has to play in providing for the well-being of society. As an example, oil companies are aware of their role as providers of energy for society, faced with the problems of protecting the environment and preserving the earth’s dwindling energy resources.
   • Provision of services
     The major objectives of some companies will include the provision of a service to the public. Entities like Shire bus lines much as they will be looking for profitable bus routes they are supposed to provide services to certain sections of the country regardless of the expected profit or loss expected from these services.
   • Quality service to customers
     Responsibilities towards customers include providing a product or service of quality that customers expect, and dealing honestly and fairly with customers.