Institute of Financial Accountants (IFA) Qualifications Financial Management for SMEs Syllabus

Financial Management for SMEs syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Financial Management for SMEs in Institute of Financial Accountants (IFA) Qualifications, not a summary of it.

1. 1

   The Financial Management Function

   3 topics

   • Objectives of financial management
     • Shareholder wealth and profit maximisation
     • Stakeholder and agency considerations
   • The role of the financial manager in an SME
   • The relationship between financial and management accounting
2. 2

   Working Capital Management

   4 topics

   • The working capital cycle
     • Inventory, receivables and payables days
     • The cash operating cycle
   • Management of receivables and payables
     • Credit control and settlement discounts
     • Factoring and invoice discounting
   • Inventory and cash management
     • Economic order quantity and buffer inventory
     • Cash management models and short-term investment
   • Overtrading and working capital financing strategies
3. 3

   Sources of Finance

   4 topics

   • Short-term and medium-term finance
     • Overdrafts, bank loans and trade credit
     • Leasing and hire purchase
   • Long-term equity and debt finance
     • Ordinary and preference shares
     • Loan stock, bonds and convertibles
   • Finance for small and growing businesses
     • Venture capital and business angels
     • Government grants and crowdfunding
   • The cost of capital and gearing
4. 4

   Investment Appraisal

   4 topics

   • The time value of money
     • Compounding, discounting and annuities
   • Discounted cash flow techniques
     • Net present value
     • Internal rate of return
   • Traditional appraisal methods
     • Payback and discounted payback
     • Accounting rate of return
   • Risk and uncertainty in appraisal
     • Sensitivity analysis
     • Expected values and scenario analysis
5. 5

   Business Valuation and Risk

   3 topics

   • Methods of business valuation
     • Asset-based and earnings-based valuations
     • Dividend valuation and discounted cash flow methods
   • Financial risk and management
     • Interest rate and credit risk
   • Foreign exchange risk for SMEs
     • Transaction and translation exposure
     • Forward contracts and hedging basics

Financial Management for SMEs flashcards for Institute of Financial Accountants (IFA) Qualifications

25 of 72 cards from the Financial Management for SMEs deck — real questions with worked answers.

1. What is the primary objective of financial management in a profit-oriented company?

   To maximise shareholder wealth, usually expressed as maximising the market value of the owners' equity (and dividends), rather than simply maximising short-term accounting profit.

2. List the three core decision areas of financial management.

   1) The investment decision (which assets/projects to acquire), 2) The financing decision (how to raise funds — equity vs debt), and 3) The dividend decision (how much profit to distribute vs retain).

3. Why is profit maximisation considered an inadequate objective compared with wealth maximisation?

   Profit ignores the timing of returns, the risk involved, the need for reinvestment, and can be manipulated by accounting policies; wealth maximisation accounts for cash flows, time value and risk.

4. In an SME, what objectives may replace or supplement shareholder wealth maximisation?

   Owner-managers often pursue survival, satisfactory profit (satisficing), maintaining control/independence, lifestyle goals, and growth, rather than pure value maximisation.

5. What are the main roles of the financial manager in an SME?

   Raising finance, managing working capital and cash flow, investment appraisal, financial planning and budgeting, risk management, and providing financial information to support decisions.

6. Distinguish financial accounting from management accounting in terms of purpose and audience.

   Financial accounting produces statutory, historic, externally-audited reports for outside users (shareholders, lenders, HMRC). Management accounting produces internal, forward-looking, often unaudited information to help managers plan, control and decide.

7. Give three ways management accounting differs from financial accounting besides audience.

   It is not legally required, has no prescribed format, can be future-oriented and frequent (e.g. monthly), and can focus on segments rather than the whole entity.

8. Define the working capital cycle (operating/cash cycle).

   The length of time between paying for raw materials/inventory and receiving cash from the sale of finished goods to customers.

9. State the formula for the working capital (cash operating) cycle in days.

   $$\text{Cycle} = \text{Inventory days} + \text{Receivables days} - \text{Payables days}$$

10. How is the inventory holding period (days) calculated?

    $$\text{Inventory days} = \frac{\text{Average inventory}}{\text{Cost of sales}} \times 365$$

11. How is the receivables collection period (days) calculated?

    $$\text{Receivables days} = \frac{\text{Trade receivables}}{\text{Credit sales}} \times 365$$

12. How is the payables payment period (days) calculated?

    $$\text{Payables days} = \frac{\text{Trade payables}}{\text{Credit purchases (or cost of sales)}} \times 365$$

13. What does a longer working capital cycle imply for financing?

    A longer cycle means more cash is tied up in working capital for longer, increasing the financing requirement and the risk of liquidity problems.

14. Define overtrading (undercapitalisation).

    When a business expands its sales/operations too rapidly without sufficient long-term capital to support the resulting increase in working capital, leading to liquidity strain despite being profitable.

15. List three typical symptoms of overtrading.

    Rapid sales growth, falling liquidity ratios, increasing reliance on short-term finance/overdraft, lengthening payables days, low or falling cash balances, and rising inventory and receivables.

16. Contrast aggressive and conservative working capital financing strategies.

    An aggressive policy finances more of working capital (even some permanent current assets) with short-term sources — cheaper but riskier. A conservative policy uses long-term finance for most current assets — safer but more costly, with lower returns.

17. What is the matching (maturity-matching) principle of working capital financing?

    Permanent (long-term) assets and the permanent portion of current assets should be financed with long-term funds, while fluctuating/temporary current assets are financed with short-term funds.

18. State the objective of receivables management.

    To minimise the cost of credit (financing, administration, bad debts) while maintaining a credit policy that maximises profitable sales.

19. Name three components of a credit policy for managing receivables.

    Credit assessment/granting criteria, setting credit terms and limits, invoicing and collection procedures, offering cash (settlement) discounts, and credit insurance/factoring.

20. What is factoring, and what core service does it provide?

    Factoring is selling trade receivables to a finance company that administers the sales ledger and advances cash (typically up to ~80%) against invoices; it may be with or without recourse for bad debts.

21. How does invoice discounting differ from factoring?

    Invoice discounting provides finance against receivables but the business retains control of its own sales ledger and collection, and it is usually confidential to customers; factoring involves the factor managing the ledger.

22. State the objective of trade payables management.

    To obtain the maximum useful credit period from suppliers (a free source of finance) without damaging supplier relationships, losing discounts, or risking supply.

23. What are the three motives for holding cash (Keynes)?

    The transactions motive, the precautionary motive, and the speculative motive.

24. What is the purpose of the Baumol model of cash management?

    It applies the economic order quantity logic to cash, determining the optimal amount of cash to transfer from investments to the current account each time to minimise total transaction plus holding (interest) costs.

25. State the Baumol model formula for the optimal cash transfer amount.

    $$Q = \sqrt{\frac{2 \, C \, D}{i}}$$ where $C$ = cost per transaction, $D$ = annual cash demand, and $i$ = interest (opportunity) cost per period.

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