ACCA FM key terms

The process of planning, organising, controlling and monitoring the financial resources of an organisation so that its objectives are achieved. It covers the investment, financing and dividend decisions taken by managers.

The objective of increasing the long-term value of the owners' stake, usually expressed as maximising shareholder wealth. Unlike profit maximisation, it takes account of timing, risk and cash flows rather than accounting profit.

A conflict of interest arising when managers, acting as agents for shareholders, pursue their own goals rather than those of the owners. It creates agency costs, such as monitoring costs and incentive schemes.

The system of rules, practices and processes by which a company is directed and controlled. It determines how objectives are pursued, how risk is monitored and how managers are held accountable to shareholders.

Any group or individual with an interest in the activities of an organisation, such as shareholders, employees, customers, suppliers, lenders and the wider community. Their claims may conflict and must be balanced by management.

Actions by a central bank to influence the money supply and interest rates in order to control inflation and support economic activity. It affects borrowing costs, exchange rates and a company's cost of capital.

Government decisions on taxation and public spending used to influence the level of economic activity. Changes in tax rates and government expenditure affect demand, inflation and companies' cash flows.

The process by which financial institutions bring together savers with surplus funds and borrowers who need funds, reducing transaction costs and sharing risk. Banks, pension funds and insurance companies are examples.

The extent to which share prices reflect all available information. In a semi-strong efficient market, prices adjust quickly to public information, so trading on published data cannot earn abnormal returns.

The time between paying suppliers for goods and receiving cash from customers. It equals inventory days plus receivable days less payable days, and measures the working capital funding requirement.

A situation where a business expands its sales faster than its long-term capital can support, leaving the working capital cycle underfunded. It causes severe cash shortages even when the business is profitable.

The order size for inventory that minimises the total of ordering costs and holding costs, assuming constant demand and known lead times. It balances the cost of placing orders against the cost of holding stock.

A cash management model that sets upper and lower cash limits together with a return point. When the cash balance reaches a limit, the firm buys or sells investments to restore the target balance.

An arrangement in which a business sells its receivables to a specialist institution at a discount. The factor collects the debts and may also provide finance, sales ledger administration and bad debt protection.

The finance a supplier offers a customer by allowing payment after delivery, usually within a stated credit period. It is a short-term source of funds and may carry an early settlement discount.

An incremental, future cash flow that changes as a direct result of a decision. It excludes sunk costs, committed costs and non-cash items such as depreciation, but includes opportunity costs.

The difference between the present value of a project's cash inflows and the present value of its outflows, discounted at an appropriate cost of capital. A positive NPV increases shareholder wealth.

The discount rate at which a project's net present value equals zero. It is compared with the cost of capital: a project is acceptable when the IRR exceeds the required return.

The time taken for cumulative cash inflows from a project to equal the initial investment. It is simple to apply but ignores cash flows after payback and the time value of money.

The constant annual cash flow that has the same present value as a project's NPV over its life. It is used to compare projects with different lives that can be repeated.

A situation where a firm has limited funds and cannot undertake every positive NPV project. Rationing caused by internal policy is soft; rationing imposed by the capital markets is hard.

A technique that shows how far a single input to an investment appraisal can change before the accept or reject decision changes. It identifies the variables to which a project is most sensitive.

An offer of new shares to existing shareholders in proportion to their current holdings, usually at a discount to the market price. It raises equity finance while avoiding dilution of control.

A bond that gives the holder the right to exchange it for a fixed number of shares at a set price on specified future dates. It normally carries a lower coupon than straight debt.

A contract giving the right to use an asset for a period in return for rental payments. An operating lease is a short-term hire; a finance lease transfers most risks and rewards of ownership.

An agreement between two parties to exchange interest payments, typically fixed for floating, on a notional principal amount. It allows each party to obtain the type of interest rate exposure it prefers.

A contract that fixes the interest rate to be paid or received on a future borrowing or deposit of a specified amount and period. It hedges short-term interest rate exposure.

A method of hedging currency exposure by borrowing or depositing in the relevant currencies now, so that a foreign currency receivable or payable is matched when it falls due.

A process in which group companies or trading partners offset amounts owed to and by each other, so that only the net balance is settled. It reduces transaction costs and currency exposure.

An estimate of the maximum loss a portfolio may suffer over a given period at a specified confidence level. It summarises market risk exposure in a single monetary figure.

A company's average cost of funds, calculated by weighting the cost of each source of finance by its market value. It is the discount rate applied to projects of average business risk.

The return required by shareholders to compensate them for the risk of holding the company's shares. It can be estimated using the dividend growth model or the capital asset pricing model.

A measure of how sensitive a share's returns are to movements in the market return. A beta above one indicates a share more volatile than the market; the equity beta reflects both business and financial risk.

The proportion of a company's capital provided by debt rather than equity. Higher gearing increases financial risk and raises the return required by shareholders.

A valuation method that applies the price-earnings ratio of comparable listed companies to the earnings of a target business. The ratio is the market price divided by earnings per share.

Cash generated by a business after the investment needed to maintain and expand operating capacity. For valuation it is discounted at the weighted average cost of capital to give enterprise value.

The additional value created when two businesses combine, so that the value of the combined entity exceeds the sum of the values of the separate companies. It may come from cost savings or revenue gains.