This article explains the approach to examining Financial Management and clarifies any uncertainty regarding the content of the syllabus. For students planning to take this exam, a good place to start is the ACCA website, where the Financial Management Syllabus and Study Guide – together with the Specimen Exam and its suggested answers – can be found.
The aim of Financial Management is to develop the knowledge and skills expected of a finance manager – in relation to investment, financing, and dividend decisions. The syllabus is designed to equip candidates with the skills that would be expected from a finance manager responsible for the finance function of a business.
From a relational point of view, Financial Management builds on knowledge gained through studying Management Accounting and also prepares candidates for further study of financial management in Advanced Financial Management. Students who are exempt from Management Accounting should ensure that they are familiar with its content by referring to its Syllabus and Study Guide.
The first two sections of the syllabus consider the role and purpose of the finance manager, and the financial management environment. As financial management decisions support the achievement of business objectives, the syllabus explores the link between objectives, strategy, and stakeholders. Financial management decisions are influenced by factors external to the organisation, so the syllabus also considers the impact of government economic policy in key areas such as interest rates and exchange rates, as well as the nature and role of financial markets and institutions.
The next three sections of the syllabus look at working capital management, investment appraisal, and business finance. Managing working capital is a key concern of the finance manager, who must balance the conflicting objectives of profitability and liquidity. Investment decisions constitute one of the three decision areas of financial management, and the finance manager must be able to identify relevant cash flows, and evaluate a proposed investment and its effect on the organisation.
Financing decisions, another of the three decision areas of financial management, are considered in the business finance section of the syllabus. A finance manager must be able to identify and evaluate the most appropriate sources of finance to meet organisational financing needs. One of the key relationships in financial management is that between risk and return, and this section of the syllabus also looks at the cost of capital and the influence of capital structure on the average cost of capital. Candidates must be able to calculate the cost of individual sources of finance and the average cost of organisational finance, and critically discuss whether financing choices can reduce the average cost of capital and thereby increase the value of the organisation as a whole.
The next section of the syllabus looks at business valuation. Candidates must be able to value both financial assets, such as ordinary shares and bonds, and a business as a whole. Evaluation of financial choices is a key theme here and candidates are expected to be able to discuss, as well as apply, a range of valuation methods.
The final section of the syllabus looks at risk management in relation to foreign currency risk and interest rate risk. Candidates should have an awareness of the different types of foreign currency and interest rate risk, and of the possible reasons why these arise. Candidates will need to be able to evaluate and apply both internal and external risk management (hedging) methods, using the methods identified in the syllabus. Note that evaluation of derivative-based hedging methods – such as those using futures, options, and swaps – is not required.
The main capabilities are described in the syllabus. Candidates who successfully pass the Financial Management exam will be able to:
You will recognise that these seven capabilities reflect the seven sections of the syllabus.
The Financial Management exam contains three sections: Section A, Section B and Section C.
Each exam will contain tables of discount factors and annuity factors, together with a formulae sheet, as in the Specimen Exam. Candidates must ensure that they are familiar with the formulae given in the formulae sheet.
Candidates should familiarise themselves with the functionality available in the exam, using the Specimen Exam, constructed response workspace and instructional videos which can be found on the ACCA website.
The Specimen Exam illustrates the kind of questions that will be set.
Sections A and B cover the whole syllabus and the objective test questions cover the topics in a random order. The Specimen Exam illustrates the kinds of questions that will be used, as well as the likely balance between calculation and non-calculation questions. Since the whole syllabus is covered, no parts of the syllabus can be neglected during study.
Section C contains questions that look in more depth at different areas of the syllabus, in terms of both calculation and discussion.
The first Section C question in the Specimen Exam requires, for 20 marks, calculation of net present value, internal rate of return and return on capital employed for an investment proposal, and discussion of findings and financial acceptability and a further discussion on the conflict of stakeholders’ objectives.
The second Section C question requires, for 20 marks, calculation of a share price, capital gearing and weighted average cost of capital, a discussion of whether changing dividend policy will affect the share price and an explanation of different levels of risk and return.
In order to pass Financial Management, candidates should:
Written by a member of the Financial Management examining team