Introduction of Fundamental Finance

TASMANIAN SCHOOL OF
BUSINESS AND ECONOMICS
Welcome BFA503
Unit Co ordinator: Roger Colbeck
Based on slides prepared By

Alex Proimos, John Wiley & Son
If you are studying this Unit you must already have

developed skills and strategies that have helped you
to achieve success in previous units.
However, the subject matter of this Unit may be new
to you. In addition to practical problem solving, the
Unit requires ability for critical thinking and good
communication skills.
9/07/2016
You should do well in this Unit if you:
have a strong interest in financial management;

keep up-to-date with your coursework;
consolidate your understanding by making
appropriate notes and summaries;
give yourself enough time to prepare for your Online Test and Assignments;
discuss the concepts and issues raised in the Unit
with other students; and
take responsibility for your own learning.
9/07/2016
Why is financial management part of the

MPA?
Rule # 1 You need it
According to Dunn & Bradstreet, more than
80% of small business failures in Australia
are the result of bad financial management
poor cash flow, debtors out of control, lack of
focus on profit margins, and overtrading
beyond your businesss ability to meet
commitments.
All of these issues can be overcome simply
by implementing the right financial
management systems and processes
4
9/07/2016

MPA?
Rule # 2 You cannot manage what you do
not measure
deciding what to measure is the most
important first step in this process.
9/07/2016

MPA?
Rule # 2 You cannot manage what you do not
measure
If its sales then focus on lead generation,

conversions and purchase value.
If its cashflow, then collection days,
turnaround time on issuing invoices or the
amount of time sales staff spend explaining
payment terms might be important.
6
9/07/2016

MPA?
not measure
Or maybe the most important feature for
your customers is speed of delivery; so
productivity, assembly, shipping and
accurate completion of order forms is
important to measure.
9/07/2016

MPA?
not measure
Once youve decided what to measure,
make sure you give adequate thought to
how you measure and use the
information.
Other rules later
9/07/2016
Unit Outline
If the answer to your question is in the
unit outline, we will respond see unit
outline
BFA503 Question & Answer

If the answer to your question is in the
Q&A, we will only answer see Q&A
ASSESSMENTS
Assessment task
Ten(10) Online tests
Test
10%
15%
Workshop engagement
End of semester exam
11
Percent weighting
total
15%
60%
9/07/2016
Workshop
Listed at the end of each topics power
point
Selected Solutions will be loaded on
MyLO weekly
Workshop participation/presentation
In week one you will be allocated/form a workshop

participation/presentation group for the semester.
Maximum of 3 persons.
Prior to the workshop you are to prepare a group response
to workshop questions and problems.
Each workshop 2 to 3 groups will be asked at random to
present and discuss a group response
to workshop questions and problems.
Workshop participation/presentation
Your 15% tutorial participation mark will be assessed on the following
factors:
One case study presentation as allocated to the group (5 marks). You

will be advised of your case study prior to presentation.
Presentation skills.
To discuss workshop questions and problems within a designated group

and then to present the groups response to the rest of the class.
All group members are required to contribute to your group discussion,

listen actively and respectively to others.
Willingness to answer and/or ask questions in regard to the groups

presentation.
Participation marks may be given for incorrect answers presented by

the group if they reflect thoughtfulness and are insightful.
Originality of the group contribution. Group participants who read out an

answer(s) directly from the textbook (rather from their own hand written
or typed notes),will receive a reduced or zero participation mark in a
workshop.
Workshop delivery
Due to our timeframe of 12 workshops from time

to time non essentials topics may be only briefly
covered.
These topics will not be assessable in the final
examination.
Unit Content degree of difficulty
This is an accredited accounting unit approved

by all the accounting bodies and therefore must
also meet their minimum standards
As a post graduate accounting accredited MBA

unit it covers a wide range of accounting
concepts/computational problems. The delivery
and assessment design undertaken reflects the
level/learning outcomes .
As detailed in the unit outline it requires selfdirected and independent students
16
9/07/2016
Unit Outline/ Q & A - lets review

Key points
17
http://www.switzer.com.au/video/funkekupper100714/
https://www.commsec.com.au/default.asp
x
http://datanalysis.morningstar.com.au/af/d
athome?xtm-licensee=datpremium
18
9/07/2016
TASMANIAN SCHOOL OF
BUSINESS AND ECONOMICS
The financial manager

and The Company
Lecturer: Roger Colbeck
The role of the financial manager

It is all about cash flows
A firm generates cash flows by selling the
goods and services produced by its productive
assets and human capital.
The firm can pay the remaining cash, called
residual cash flows, to the owners as a cash

dividend, or reinvest the cash in the business.

It is all about cash flows
A firm is unprofitable when it fails to generate
sufficient cash flows

Firms that are unprofitable over time will be
forced into bankruptcy by their creditors.

In bankruptcy, the company will either be
reorganised, or the companys assets will be

liquidated
Cash flow diagram

Three fundamental decisions in financial management
The capital budgeting decision:
Which productive assets should the firm buy?

The financing decision:
How should the firm finance or pay for assets?

Three fundamental decisions in financial
management
Working capital management decisions:
How should day-to-day financial matters be
managed?
How financial managers decisions affect

the Balance Sheet
Strengths of the basic legal forms of business

organisation
Weaknesses of the basic legal forms of business

organisation
Managing the financial function

Chief Executive Officer (CEO)
Ultimate management responsibility and
decision-making power in the firm.

Reports directly to the board of directors, which is
accountable to the companys owners.

Chief Financial Officer (CFO)
Reports directly to the CEO and manages all
aspects of the companys financials

CFOs Key Financial Reports:
The Controller prepares financial
statements, oversees the firms cost

accounting systems, prepares taxes, and
works closely with the firms external
auditors.

CFOs Key Financial Reports:
The Treasurer looks after the collection
and disbursement of cash, invests

excess cash, raises new capital, handles
foreign exchange, and oversees the
firms pension fund managers
10

CFOs Key Financial Reports
The Internal Auditor is responsible for in-depth
risk assessments, performing audits of high-risk

areas

External auditors
Provide an independent annual audit of the
firms financial statements.

Ensure that the financial numbers are
reasonably accurate, and accounting principles

have been consistently applied

Audit committee
Has responsibility of overseeing the
accounting function and preparation of the

company financial statements.
Conducts investigations of fraud and theft
and also ensures that the external auditors
are independent from management.
11
Company organisation chart
Workshop questions
Critical Thinking: 1.1, 1.2,
Questions and Problems: 1.2, 1.7, 1.9
Part 2
36
9/07/2016
12
The goal of the company

What should management maximise?
Minimising risk or maximising profits
without regard to the other is not a

successful strategy.
Why not maximise profits?

Under creative accounting, a
decision that increases profits under

one set of accounting rules can
reduce it under another.
Accounting profits are not necessarily
the same as cash flows.

Profit maximisation does not tell us
when cash flows are to be received.

Profit maximisation ignores the
uncertainty or risk associated with

cash flows.
13

Maximise the value of the companys share price
When analysts and investors determine the value of
a companys share price, they consider
The size of the expected cash flows
The timing of the cash flows
The riskiness of the cash flows.
The mechanism for determining share prices are
based predominately on cash-flows from correct

and well executed business decisions
The goal of the firm

Can management decisions affect share prices?
YES!!!
Major factors affecting share

prices
14
Agency conflicts:
separation of ownership and control
Ownership and control
For large companies, the ownership of the firm
is spread over huge number of shareholders and

the companys owners may effectively have little
control over management
management may make decisions that benefit
their self-interest rather than those of the
shareholders.
Agency conflicts:
Agency relationships
An agency relationships arises whenever one
party, called the principal, hires another

party, called the agent
Agency conflicts:
Do managers really want to maximise share price?
Shareholders own the company, but
managers control the money and have the

opportunity to use it for their own benefit.
Agency Costs
The costs of the conflict of interest between the
companys owners and its management.
15
Agency conflicts:
Aligning the interests of management and shareholders
Management Compensation
a significant portion of management
compensation is tied to firm performance

(e.g. share price)
Agency conflicts:
Aligning the interests of management and
shareholders
Control of the firm
If the interests of the manager and the firm are
not aligned, then eventually the firm will under

perform relative to its true potential
Agency conflicts:
Aligning the interests of management and
shareholders
An Independent Board of Directors
Lack of board independence is a key factor in
the misalignment between board members and
shareholders interests
16
The importance of ethics in business

Business Ethics
A societys ideas about what actions are
right and wrong.
Are Business Ethics Different?
Traditions of morality are relevant to business
and financial markets

Corruption in business creates inefficiencies in
an economy
The importance of ethics in business

Types of ethical conflicts in business
Conflicts of Interest
conflict between individuals personal or
institutional gain and the obligation to serve

the interest of another party.
Information Asymmetry
one party in a transaction has information
that is unavailable to the other parties
Workshop/tutorial
Critical Thinking: 1.4, 1.8
Questions and Problems: 1.16, 1.18, 1.20,
1.21
Further Problems: next slides
17
Sample test problems
What are agency costs? Explain.
52
9/07/2016
Dick Smith
Please review article and be prepared to
discuss
53
9/07/2016
Web pages
http://www.asx.com.au/
http://www.companydirectors.c
om.au/
18
Copyright notice
Copyright 2016
University of Tasmania, TSBE
All rights reserved.
Commonwealth of Australia Copyright Regulations 1969 WARNING
This material has been reproduced and communicated to you
by or on behalf of the University of Tasmania pursuant to Part
VB of the Copyright Act 1968 (the Act). The material in this
communication may be subject to copyright under the Act. Any
further reproduction or communication of this material by you
may be the subject of copyright protection under the Act. Do
not remove this notice.
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TASMANIAN SCHOOL OF

BUSINESS AND ECONOMICS

Based on slides prepared By

If you are studying this Unit you must already have

You should do well in this Unit if you:

have a strong interest in financial management;

Why is financial management part of the

Why is financial management part of the

Why is financial management part of the

If its sales then focus on lead generation,

Why is financial management part of the

Why is financial management part of the

BFA503 Question & Answer

In week one you will be allocated/form a workshop

One case study presentation as allocated to the group (5 marks). You

To discuss workshop questions and problems within a designated group

All group members are required to contribute to your group discussion,

Willingness to answer and/or ask questions in regard to the groups

Participation marks may be given for incorrect answers presented by

Originality of the group contribution. Group participants who read out an

Due to our timeframe of 12 workshops from time

Unit Content degree of difficulty

This is an accredited accounting unit approved

As a post graduate accounting accredited MBA

Unit Outline/ Q & A - lets review

The financial manager

The role of the financial manager

residual cash flows, to the owners as a cash

The role of the financial manager

sufficient cash flows

forced into bankruptcy by their creditors.

reorganised, or the companys assets will be

Cash flow diagram

The role of the financial manager

The capital budgeting decision:

Which productive assets should the firm buy?

How should the firm finance or pay for assets?

The role of the financial manager

How financial managers decisions affect

Strengths of the basic legal forms of business

Weaknesses of the basic legal forms of business

Managing the financial function

decision-making power in the firm.

accountable to the companys owners.

Managing the financial function

aspects of the companys financials

statements, oversees the firms cost

Managing the financial function

and disbursement of cash, invests

Managing the financial function

risk assessments, performing audits of high-risk

Managing the financial function

firms financial statements.

reasonably accurate, and accounting principles

Managing the financial function

accounting function and preparation of the

Company organisation chart

The goal of the company

without regard to the other is not a