One of the exams that I am taking in December is Financial Management which covers areas such as working capital management, investment appraisal and treasury management. It covers not the day to day financial management of an organisation but the medium term decisions that have to be made. To help my understanding of some of the issues I try to read financial pages of the newspaper on a regular basis. Something I would recommend what ever course you are studying.
With banks going out of business due to liquidity problems and the financial markets in a state of turmoil, reading the financial pages is proving to be very distracting, mainly due to the volume of material. It is also frequently very confusing, I thought I understood derivates but now I’m not so sure. Reading about the credit crunch and the almost inevitable economic recession in the context of business of all types, however is extremely helpful in my understanding of financial management.
The one message that I have taken away from all the information in the paper is that liquidity is extremely important for all organisations (not just the banks). My course provides very useful ways to measure the length of the operating cycle so that businesses can work out their working capital requirement i.e. how much cash they need to meet their needs daily. In reality however the assumption behind making these calculations are extremely important. For example an increase in receivable days (money owed to the company) can easily increase as customers struggle to pay on time due to a decrease in their own sales. Similarly payable days can fall as supplier demand payment sooner. Assumptions made therefore in working out working capital requirements must therefore not just be based on past information but on forecasts for the future which take into account a downturn in the economy.
The other useful piece of information that I am taking away from recent events is that market confidence if lost can be extremely damaging for a listed company even if the accounts show a healthy position. For example loss of confidence in a company can lead to suppliers refusing to supply goods, banks calling in their overdrafts and even customers staying away if there is a time between buying goods and them being delivered. It explains why companies have to consider their dividend policies carefully. A fall in dividend for example to fund an investment, can give the wrong signal to the shareholders who may then wrongly conclude the company has financial problems. It explains why many companies keep dividend constant even when they have exceptionally good years.
Potential loss of market confidence also helps to explain why companies in considering the return on investments have to take into account the short term and long term benefits to the company and the shareholders. While a project’s return, measured by which ever of the accepted methods, can appear profitable, a listed company still has to consider the impact on shareholders who desire for profit maximisation may have a much shorter timescale.
With my exam in financial management now less than two months away, I now need to get down to revising it. I certainly intend to keep up date with the financial news but I must make sure it doesn’t distract me too much from my revision and the existing syllabus!
very useful information. I am a 2nd yr Accounting and Finance student and your information has helped me with my Financial Management Assignment on Investment Appraisal. thank you very much angela
Posted by: colline muchechetere | 30 March 2009 at 17:05
Very useful points highlighted here Angela about impacts of working captical ,dividen policy, and shareholders perception, very useful. Thanks keep it up
And yes reading financial news is some times very time consuming. And most of the time I am confused about which articles or news should I read because some time their titles does not provide complete idea whether this news would be useful for me or not. And then it becomes a demotivation toward reading financial news.
People, kindly provide some insight about how to deal with this issue.
Posted by: MfaisalM | 09 October 2008 at 11:02