Business Finance - role of financial management Flashcards
Strategic role of financial management
- profitability
- growth
- efficiency
- liquidity
- solvency
What is gross profit (objectives of financial management)
amount of money left from revenue after subtracting the costs of goods sold (COGS)
For example;
if a company makes $10,000 in revenue and $4,000 is COGS, the gross profit is $6,000
What are Cost of Goods Sold
This is starting inventory + purchases during the period - ending inventory
all direct costs incurred to create the products a company offers - most a variable E.g. materials + labour - some are fixed E.g. rent + lease
What is net profit (objective of financial management)
The final amount after all expenses have been subtracted
E.g. wages, utilities and advertising
What can growth refer to (Objective of financial management)
increase in;
- sales
- market share
- customers
- physical size of premises
- range of product
- expansion overseas
What does efficiency refer to (objectives of financial management)
reducing the costs of producing goods or services
E.g. producing the same volume and quality of products for less
It can also refer to the speed and reliability of collecting money from its debtors
What is liquidity (objectives of financial management)
measure of how quickly a business can convert its assets to cash
this is critical as a business is able to pay its creditors (accounts payable) + maintain day to day obligations + efficiently collect money owed to the business
What is solvency (objectives of financial management)
ability to pay both its short and long term debts as they fall due
- ability to continue to operate
If they are unable –> business is called ‘insolvent’
What are short term objectives
they are tactical (1-2 years) and operational (day to day) plans
what are long-term objectives
are strategic plans of a business, generally longer than 5 years
- tend to be broad goals such as increasing profit or market share
- requires a series of short-term goals to assists its achievements
What are the conflicts between achieving short + long term objectives
A business may aim for high profit in long-term objectives however, this will require purchasing stock in short-term which can reduce liquidity
Interdependence of finance with operations
finance is required for the purchasing of inputs, machinery and land, to create value whilst also receiving a return on investments
Operations manages stock and outsourcing whilst finance monitors the costs
Example of finance + operations interdependence (Apple)
Apple contracts with its outsourcing partners to assemble the iPhone based on the budgets set by finance
Operations will need to design and develop future models of iPhones based on the funds allocated by finance for research, development and production
Interdependence of finance with marketing
Marketing is the way most businesses generate sales
Finance establishes budgets and forecasts a report marketing must follow
Interdependence of finance and marketing case study (Apple)
marketing will depend on finance to provide various secondary market research data, such as sales trends for each of the geographical regions in which iPhone is sold
For example, if the financial reports indicate a decline in sales for the iPhone SE in India, the marketing mix could be adapted to more effectively target this important growth market
