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Qualification - OTHM Level 5 Diploma in Accounting and Business
Unit Name - Financial Management
Unit Level - Level 5
Unit Reference Number - T/617/3298
Assignment Title - Financial Management
Unit Credit - 20
Learning outcome 1: Understand key financial theories.Answer: Key financial theories provide frameworks for understanding how financial markets operate, how individuals and organizations make financial decisions, and how risk and return are related. The Efficient Market Hypothesis (EMH), in its various forms (weak, semi-strong, and strong), posits that asset prices fully reflect all available information, making it impossible to consistently achieve abnormal returns. This suggests that active trading strategies are unlikely to outperform a passive, diversified approach. Complementing this, the Modern Portfolio Theory (MPT), pioneered by Harry Markowitz, emphasizes diversification as a means to optimize a portfolio's expected return for a given level of risk. MPT introduces the concept of the "efficient frontier," representing portfolios that offer the highest expected return for each level of risk. Building on MPT, the Capital Asset Pricing Model (CAPM) is a widely used model for determining the theoretically appropriate required rate of return of an asset, given its systematic risk. CAPM links an asset's expected return to the market's expected return and the asset's beta (a measure of its volatility relative to the market). While these theories primarily focus on rational decision-making, the emergence of Behavioral Finance acknowledges that psychological biases and irrationality can significantly influence financial decisions and market anomalies, offering a counterpoint to the purely rational assumptions of traditional finance theories. Together, these theories offer a comprehensive, albeit sometimes contrasting, view of the intricate world of finance.
Learning outcome 2: Understand working capital management.
Answer: Working capital management is the strategic process of optimizing a company's current assets and current liabilities to ensure sufficient liquidity for day-to-day operations and to maximize profitability. It fundamentally involves striking a delicate balance between having enough cash on hand to meet immediate obligations and efficiently utilizing resources to generate returns. Key components include managing cash and cash equivalents, accounts receivable (money owed by customers), accounts payable (money owed to suppliers), and inventory. Effective working capital management is crucial for a business's financial health as it ensures uninterrupted operations, enhances liquidity, boosts profitability by minimizing costs associated with excess inventory or delayed collections, and strengthens creditworthiness. By carefully monitoring metrics like the cash conversion cycle, inventory turnover, and days sales outstanding, businesses can optimize their cash flow, reduce reliance on external financing, and position themselves for sustainable growth and the ability to capitalize on new opportunities.
Learning outcome 3: Be able to review techniques to manage global risk.
Answer: Managing global risk is paramount for businesses operating internationally, as it involves navigating a complex landscape of political, economic, operational, and cultural challenges. Effective techniques begin with thorough risk identification and assessment, which entails systematically pinpointing potential threats (e.g., geopolitical instability, currency fluctuations, supply chain disruptions, regulatory changes, cybersecurity threats) and evaluating their likelihood and potential impact. Once identified, companies employ various risk mitigation strategies: risk avoidance (eliminating activities that expose the organization to unacceptable risk), risk reduction (implementing controls and safeguards to minimize the likelihood or impact of risks, such as diversifying supply chains or bolstering cybersecurity), and risk transfer (shifting risk to a third party, often through insurance or contractual agreements). For risks that cannot be entirely avoided, reduced, or transferred, businesses may opt for risk acceptance, provided they have established clear tolerance levels and contingency plans. Continuous monitoring and review are vital, involving the use of key risk indicators (KRIs), real-time data analytics, and regular audits to ensure that strategies remain relevant and effective in a dynamic global environment. Furthermore, cultivating a risk-aware culture throughout the organization and leveraging technology for early warning systems and efficient data analysis are crucial for proactive and agile global risk management.
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Assistance with Unit 2 of the Higher National Diploma in Business, focusing on Marketing Processes and Planning, is available.
Aims:
The aim of this unit is to provide learners with knowledge of key financial theories and working capital management, and the skills to review techniques for managing an organisation's global financial risk.
LO1
Financial theories: theories and their application to financial decision making; theories - Arbitrage Pricing Theory, Rational Choice Theory, Prospect Theory, Cumulative Prospect Theory, Monte Carlo Option Model, Binomial Options Pricing Model, Gordon Model and International Fisher Effect.
Techniques and tools: portfolio management tools; models of strategic management; objective setting; definition of the balanced scorecard; using balanced scorecard to implement strategy; portfolio theory and risk.
You can receive assistance with Unit 4.52, "Human Computer Interaction," as part of the ATHE Level 4 Diploma in Computing.
LO 2
Nature, elements and importance of working capital: definition of working capital; characteristics of working capital; elements of working capital; objectives of working capital (liquidity, profitability); conflict between liquidity and profitability; role in financial management; importance for different types of business organisations to include (sole trader, partnership, private limited company, public limited company, third sector organisations).
Assessment of needs and funding strategies: calculating working capital requirement: working capital cycle; terms of trade; investment in current assets; liquidity of assets; funding strategies (permanence of current assets; long and short term finance; matching principle; attitude to risk.
Management of working capital: cash operating cycle; use of rations (current, quick, inventory turnover, debtor turnover, sales revenue to working capital); inventory management (e.g. economic order quantity, just in time); managing accounts receivable (establishing creditworthiness, collection of debt; settlement incentives; factoring and discounting); managing trade credit; managing cash (cash flow forecast, cash management models (e.g. Baumol, Miller-Orr), using short term investment).
LO3
Financial risk: costs and risks of different sources of finance; foreign currency risks; interest rate risks; causes of fluctuations in exchange and interest rates;
Risk mitigation: hedging techniques for foreign currency; hedging techniques for interest rates; methods; types of exchange rates and interest that can be managed through hedging.
Evaluation of techniques: comparison of techniques; limitations and benefits of different techniques; success in using techniques to manage interest and currency risks.
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Learning Outcomes- The learner will:
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Assessment Criteria- The learner can:
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1. Understand key financial theories.
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Evaluate key financial theories.
Assess strategic implementation techniques using balanced scorecard and portfolio management tools.
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2. Understand working capital management.
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Explain the nature, elements and importance of working capital in a business organisation.
Evaluate how a business organisation assesses their working capital needs and funding strategies.
Analyse how a business organisation will manage their working capital needs.
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3. Be able to review techniques to manage global risk.
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Analyse financial risks in the global market.
Analyse risk mitigation techniques.
Review the suitability of techniques used by a business organisation to manage their global risk.
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Support is provided for Unit 4.36, "Managing Business Facilities," part of the ATHE Level 4 Diploma in Business and Administrative Management.
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