The role of Financial Management
- Test the FEASIBILITY of the proposed strategy
- IS IT POSSIBLE TO PUT INTO PLACE?
- Are the financial resources available?
- It is likely that the strategy will require capital investment
- How much and when?
- Project the estimates of the relevant future cash flows generated by the project (incremental flows)
- This projection would be presented as a full cash budget
- This will reveal if the cash resources are available to fund the project
- Does company need to raise more finance?
- Identify which type of finance is required short–term OR long-term?
- If long-term what are the merits of issuing equity, issuing debt or raising loan facilities?
- CONSIDERATION MUST BE MADE to the consequences of such a decision!
- Think Mogdigliani & Miller – effect on cost of capital
- Effect on shareholder wealth
MINIMISE THE RISK
- Systems and procedures should be in place to minimise unsystematic risks
- Investment appraisal is undertaken
- 4 key investment appraisal techniques can be applied
- Advantages of the payback period:
- Simple concept to understand
- Easy to calculate (provided future cash flows have been calculated)
- Uses cash not accounting profit
- Takes risk into account (in the sense that earlier cash flows are more certain in nature)
The Payback Period
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