Nature and purpose of financial management

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Financial management can be defined as the management of the finances of an organisation in order to achieve the financial objectives of the organisation.

Profitability for the organisation to minimise cost and to maximise return Liquidity the ability to meet its operating activities Safety or security to overcome undue risk

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 Investment

Short-term: working capital management Long-term: capital budgeting

decision

Financing

Financing mix, capital structure

decision

Dividend

Dividend policy: zero, residual, constant, stable dividend policies

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decision

Primary objective: Maximisation of return to the shareholder Secondary objectives customer satisfaction increase in market shares Growth Survival innovation
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Shareholders

Environment

Employees

Government
Supplier

Management

Community
Customers
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AGENCY RELATIONSHIP: A description of the relationship between management and shareholders expressing the idea that managers act as agent for the shareholders, using delegated power to run the company in the shareholders best interest.

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Issues where there may be conflict of interest between managers and shareholders are: Information asymmetry Rewards Risk Takeover Time horizon

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Value for money (VFM) this is also referred to as the 3Es

Economy: lies in operating at minimum cost. Effectiveness: is achieving established objectives. Efficiency: consist of attaining desired results at minimum cost. It therefore combines effectiveness with economy.
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These are financial institution, which links lenders (those with surplus funds) with borrowers (those with deficit funds).

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Convenience
Provision of funds to borrowers

Aggregation
Risk diversification Diversified portfolio

Maturity transformation
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Financial markets are: market for buying and selling financial instrument Money (or bankers) market Market for buying and selling short term financial instrument
Capital market Market for buying and selling long-term financial instrument
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Examples of short-term financial instruments are: Commercial paper (CP)

Certificate of deposit (CD)

Bills (government or local authority bills)

Term bill
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Examples of long-term financial instruments are: Ordinary shares (equity) Preference shares Government bonds Corporate bonds: Redeemable bond Irredeemable bonds Convertible bonds
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The international money market is referred to as: Euro currency market. International capital market is referred to as Euro bonds market and Euro equity market. A Eurobond is a bond dominated in a currency that often differs from that of the country of issue. Note that these international markets financial instruments should not be suggested as possible source of finance for smaller business.

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Advantages of euro bonds Suitable for large organization with excellent credit rating. Its long term in nature. Can be used to finance a big capital expansion programmed. Borrowing is not subject to national exchange controls of any government. Eurobond issues can be made whenever market conditions seem favourable.

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Interest rates are effectively the price governing lending and borrowing

Factors affecting the rate of interest includes: The term

Risk The need to make profit on re-lending

Size of the loan or deposit:

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A yield curve is a diagrammatic representation of the term structure of interest rates.

Factors affecting the yield curve are: Liquidity preference

Expectation Market segmentation

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