Financial Strategies; Unit 3 - Notes

Notes made from a combination of resources including the Malcolm Surridge text book and Philip Allan revision guide.

Covers the financial quarter of the course; Financial Objectives, Using Financial Data, Interpreting Published Accounts, Financial Strategies, Investment Decisions

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Financial Objectives
A goal or target pursued by the finance department
Contributes to achieving the corporate objective
Financial Aim: The broad, general goals for the finance function
Return on Capital Employed Target:
Calculated by expressing the net profits made by a firm as a percentage of the value of the capital
employed in the firm
Very precise and simple to measure and compare
Other functional areas responses:
Increase market share
Reduce capital required to conduct trading activities
Shareholders' Return:
Short term: Current share price and any associated dividends due in the near future
Long term: Combination of short term returns as well as future share prices and dividends
Focus: Generating profits and on increasing the value of the firm as reflected in its share price
Other functional areas responses:
Minimise cost
Improve product and add value
Lose staff
Drive down purchasing costs
Cost Minimisation:
Reduce all costs of production to the lowest possible level
Supports profit maximisation and growth
Other functional area responses:
Minimise labour costs
Operate with minimal expenditure
Cash Flow Target:
A cash cycle is the time that elapses between the outflow of cash to pay for labour and raw materials
for a product or service and the receipt of cash from the sale of the product
Any firm wants at least a steady inflow of cash
If I firm cannot meets its financial commitments it can't continue trading
Supports firms wanting growth needing regular flows of cash for purchasing
Prevents overtrading when there is more outflow than inflow of cash
Influences on Financial Objectives:
Internal:
Corporate objective
Nature of the product
Objectives of senior managers
External:
Competitors

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Availability of external finance
State of the market
Using Financial Data to Measure and Asses Performance…read more

Page 3

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Balance Sheets:
Financial statement recording the amount of assets and liabilities of a firm on a particular day at the
end of an accounting period
A `snap shot' of the financial position of a firm
Always contains the date of the evaluation
Sets out the ways a firm has raised capital and uses of such capital
Stakeholder uses:
Shareholder: Asses a firm potential to make a profit
Supplier: Short term position of the fire to decide on credit offered
Manager: Indication of the performance of…read more

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Interpreting the Balance Sheet:
The short term interpretation shows the firm's ability to pay its bills over the next 12 months; if its
current assets are greater than its current liabilities it is liquid and able to pay
The long term interpretation shows the movement of non-current assets, how the firm has raised the
capital and any fluctuations in the reserves
Working Capital:
This is what remains after a firm has settled all its immediate debts
It measures the amount of money available to firm…read more

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Revenue is used to settle the firms liabilities
Depreciation:
Reduction in value of an asset of a period of time
Provides an accurate value of a firms assets through their useful life
Amount of annual depreciation will affect the overall values and profits of a firm
Firms have to depreciate their non-current assets so to spread the costs over the assets useful life as
the resale value will decrease
Makes the value of the firm recorded more accurate
Non-Cash Expense:
It is the recognition of…read more

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Required by law to publish their accounts so they are open to scrutiny by owners, potential investors
and bankers but also competitors so therefore contains as little information as possible
Provides information on earnings per share (Firms profit after tax divided per share including all
possible shares that could be issued so is lower)
Group Income Statements:
Mergers are also legally obliged to produce a group income statement that records the aggregated
position of the group as a whole
Law:
Legal requirements set out in…read more

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Importance: Provides a measure of the value or worth of the firm by using snap shot of the sources
of capital used by the firm that illustrates the liquidity to see if the firm is able to pay its current
liabilities and how it is paying for its non-current assets
Other Sources of Information:
Income Statement
Other historical financial statements
Cash Flow Statements
Income Statements:
Trends: Performance in one year can be measured against a previous; some firms provide a 5 year
summary of financial…read more

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Limitations:
Only includes financial information; doesn't give information on:
Leadership
Skills and experience
Workforce and absenteeism and labour
turnover
Market position
Product portfolio
Developments and research
Motivation
Productivity
Comparisons:
Compare performance in previous years
Compare performance to other similar firms
Judge performance against stated objectives
Bad Debts: Money owed to a firm by customers it doesn't expect to receive
Creditors: People/Firms who a firm owes money to
Inventories: Raw materials, items needed for production and complete products
Liquidity: Ability of a firm to meet its…read more

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Liquidity Radio's:
Measures the firm's ability to settle short term debts
Monitors a firms cash position
Based on balance sheet figures from one moment in time
They are vulnerable to window dressing and sudden changes in trading departments
Current Ratio:
Ability of a firm to meet its liabilities or debts over the next year or so
Firms with high current ratios may not be managing their finance effectively
To improve the ratio a firm should raise more cash through sales of fixed assets or negotiate…read more

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Expressly as a number of times a year
A low figure could be due to obsolete inventories and a high figure can indicate an effective firm
To improve this ratio a firm should hold less stock and increase sales
Receivables Days:
Calculates the time typically taken by a firm to collect the firm it's owed
Increases may be due to expansion of deals
To improve this ratio a firm needs to reduced its credit period or insisting on cash payments
Payable Days:
Calculates the time…read more

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