Chapter 9: Role of Finance management Flashcards
What is financial management?
The planning, organising, and controlling of financial resources to achieve business objectives.
Why is financial management important?
Financial management ensures profitability, return on investment, long-term stability, and growth.
What can poor financial management lead to?
Business failure due to insufficient cash flow, excessive debt, and lack of financial planning.
Strategic Role of Financial Management
What is the strategic role of each key business function?
The strategic role of each key business function involves its impact on the other key business functions + its contribution to the achievement of short- and long-term business goals.
Strategic Role of Financial Management
What is the strategic role of financial management?
Is to provide financial resources to implement the business’s strategic plan.
Strategic Role of Financial Management
What is a strategic plan?
A strategic plan outlines the goals, objectives and future direction of a business, as well as the strategies that will be used to achieve those goals and objectives.
Strategic Role of Financial Management
Name three key tasks of financial management.
1) Preparing budgets
2) Sourcing finance
3) Managing cash flow.
Strategic Role of Financial Management
Why must financial management be flexible?
Because businesses operate in a dynamic environment and must adapt to changes.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems such as?
- insufficient cash to pay suppliers
- inadequate capital for expansion
- having too much stock of finished goods or raw materials
- having too many assets that are not productive (ie. not generating revenue)
- delays in receiving funds from credit sales
- inability to pay long-term debts
- business failure
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems.
Outline the consequences of not having enough cash on hand to pay suppliers?
Suppliers would eventually refuse to supply the business with goods or services, leaving the business without essential inputs required for its operations.
Justify the importance of the finance function of a business.
Importance of the finance function of a business
– financial management is a critical success factor for businesses – many businesses fail due to poor financial planning and management.
– successful management of financial resources will allow businesses to achieve profits, a return on investment, long-term stability and growth – the main goals of all businesses
– providing adequate funds for financing of operations (+ marketing and HR) is vital to any business realising its goals and objectives.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems.
Outline possible conseqeunces if a business has inadequate capital to fund expansion?
The business may miss out on growth opportunities such as entering new markets or launching new products. This could limit its growth potential, reduce its competitive advantage, and make it harder to attract talent.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems
Outline possible conseqeunces is a business has too much stock.
Excess stock leads to increased storage and insurance costs, and products may become obsolete or spoil. This can result in financial losses and waste of resources.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems
What happens when a business has too many non-productive assets?(e.g., Empty Warehouse, Disused Factory)
Non-productive assets can cause inefficiency, increased fixed costs (like taxes, insurance, and maintenance), reduced liquidity, and opportunity cost, as capital tied up in these assets could be better utilized for growth, innovation, or debt reduction.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems
What are the consequences of delays in receiving funds from credit sales?
Delays negatively impact cash flow, making it difficult to pay short-term liabilities. This may result in increased financing costs and strained customer relationships, potentially leading to lost business.
Strategic Role of Financial Management
Mismanagement of financial resources can lead to problems
What are the consequences of being unable to pay long-term debts?
Inability to meet long-term debt obligations can lead to
1. repossession or sale of assets, insolvency, or closure of the business.
2. damages the business’s credit rating and results in a loss of investor confidence, potentially leading to decreased investment or divestment.
Objectives of financial management
What are the five main financial objectives?
- Profitability
- Growth
- Efficiency
- Liquidity
- Solvency.
Objectives of financial management
Describe what profitability is.
The ability to make financial return from business activities.
- closely related to efficinecy
Objectives of financial management
Explain how profitability is achieved.
By ensuring revenue exceeds costs and managing expenses effectively.
Maximising profits by ensuring revenues exceed by the HPA!
Objectives of financial management
Explain why profitability is important.
Profits satisfy owners and shareholders in the short-term, and are crucial for attracting and maintaining investment and for the sustainability of the business in the long-term.
Objectives of financial management
Describe what growth refers to in financial management.
Growth refers to increasing business size, value, and market share.
Objectives of financial management
Describe the ways in which a business can achieve growth.
Growth can occur internally through increased demand, productivity, and new products, or externally through mergers and acquisitions.
Objectives of financial management
Assess the potential risks of rapid business growth.
Rapid growth can cause cash flow issues, leading to unsustainable financial strain.
If a business grows too quickly they could cause cash flow issues leading to unsustainable financial strain if revenue growth doesn’t align with expenses. Furthermore, operational inefficiencies may occur due to lack of infrastructure and supply chain disruptions due to suppliers being unable to keep up with demand. This would lead to delays, errors and decline in product/service quality.
Objectives of financial management
Examine the relationship between growth and profitability.
While growth aims to increase profits, excessive expansion can lead to liquidity and financial management issues.
Objectives of financial management
Define efficiency in a business context.
Efficiency refers to minimizing costs and managing assets to achieve maximum profit with the least resources.
Objectives of financial management
Explain how efficiency improvements can impact business performance.
Efficiency improves profitability by increasing output while maintaining or reducing input costs.
Objectives of financial management
Analyse how inefficient asset management can affect profitability.
Poor asset management leads to higher costs, reduced liquidity, and lower returns on investment.
Objectives of financial management
Describe the importance of liquidity in a business.
Liquidity ensures a business can meet short-term financial obligations and avoid cash flow problems.
Explain the importance of profitability in financial management:
- Ensures long-term sustainability by exceeding costs with revenue.
- Attracts investors and allows for business expansion.
- Improves financial stability through reinvestment and retained earnings.
Objectives of financial management
Define solvency and its significance to stakeholders.
Solvency is the ability to meet long-term financial obligations, ensuring business survival and investor confidence.
Explain the importance of solvency in financial management
- Measures a business’s ability to meet long-term debts.
- Indicates financial stability and risk level to investors.
- maintaining a healthy debt-to-equity ratio ensures long-term survival.
Explain the importance of growth in financial management:
- Increases market share and revenue over time.
- Expands operations and product offerings.
- Enhances long-term profitability and business survival.
Objectives of financial management
Explain how gearing is used to measure solvency.
Gearing measures the proportion of debt to equity; high gearing indicates financial risk and potential insolvency.
Objectives of financial management
Discuss the risks associated with high reliance on debt finance.
High debt financing increases the risk of insolvency if repayments exceed cash flow from business activities.
Short-term and long-term financial objectives
Define short-term financial objectives and provide examples.
Short-term objectives focus on cash flow management and working capital to ensure business solvency. Examples include maintaining liquidity and managing operational expenses.
Short-term and long-term financial objectives
Describe how short-term financial objectives are monitored.
They are reviewed regularly to ensure targets are met and resources are used efficiently.
Short-term and long-term financial objectives
Explain the difference between tactical and operational short-term objectives.
Tactical objectives focus on expansion and capital investment (1-2 years), while operational objectives deal with daily cash flow and working capital.
Short-term and long-term financial objectives
Outline the key focus of long-term financial objectives.
Long-term objectives prioritize business growth, often through capital investment and financing decisions.
Short-term and long-term financial objectives
Examine the relationship between long-term growth and financial planning.
Growth requires capital investment, which businesses must finance through debt or equity, impacting long-term financial stability.
Short-term and long-term financial objectives
Assess how short-term and long-term financial objectives may conflict.
Investing in long-term growth (e.g., R&D, expansion) may reduce short-term profitability and liquidity due to loan repayments and slow revenue generation.
Short-term and long-term financial objectives
Analyse the potential risks of prioritizing short-term objectives over long-term growth.
Excessive focus on short-term profitability may limit investment in expansion, reducing future profitability and competitiveness.
Short-term and long-term financial objectives
Discuss why reconciling short-term and long-term objectives is challenging.
Owners prioritize long-term growth, while managers focus on short-term performance; balancing both is necessary to avoid insolvency and ensure sustainable profitability.
Short-term and long-term financial objectives
Evaluate the role of financial managers in balancing short-term and long-term objectives.
Financial managers assess competing concerns, ensuring profitability while maintaining liquidity for sustainable growth.
Objectives of financial management
Identify five indicators that a business is achieving growth (excluding share price increases).
Growth may be observed through:
- Business expansion (e.g., opening new locations, entering new markets)
- Increased revenue from higher sales
- New product development to diversify offerings
- Higher profit margins due to economies of scale or operational efficiency
- Increasing number of staff and greater market share
Objectives of financial management
Outline one similarity and one difference between liquidity and solvency.
Similarity: Both assess a business’s ability to meet financial obligations.
Difference: Liquidity refers to short-term financial obligations (e.g., paying suppliers), while solvency measures the ability to meet long-term financial commitments (e.g., repaying loans).
Objectives of financial management
Explain how borrowing funds to purchase new aircraft and expand flight services impacts short-term and long-term financial objectives.
Short-term impact: Increases financial pressure due to loan repayments, potentially reducing liquidity and short-term profitability.
Long-term impact: Supports business growth by expanding operations and increasing revenue potential, improving long-term financial stability and market position.
Interdependence with other key business functions
What does interdependence mean in the context of business functions?
Chapter 1 interdependence
Interdependence refers to the mutual reliance that key business functions have on one another. Each function depends on others to achieve the broader goals of the business.
Interdependence with other key business functions
How does the operations function depend on finance?
Operations require finance to fund activities like purchasing new machinery, paying wages, and investing in equipment and facilities. Efficient operations can also contribute to financial objectives by reducing production costs or increasing output.
Interdependence with other key business functions
How does the marketing function rely on finance?
Marketing depends on finance to fund promotional campaigns, develop marketing strategies, and track performance. Finance helps allocate funds to marketing activities and assesses the effectiveness of campaigns through financial criteria like sales and profitability.
Interdependence with other key business functions
How does the human resources function rely on finance?
HR needs finance to pay wages, fund training and development programs, and support staffing decisions. Effective HR management contributes to financial objectives by increasing productivity, reducing labor costs, and improving profitability.
Interdependence with other key business functions
How does operations contribute to the finance function?
Efficient operations can help reduce costs, increase output, and improve profitability. Effective inventory management can also improve liquidity by freeing up cash to meet short-term liabilities.
Interdependence with other key business functions
How does HR contribute to the finance function?
HR contributes to financial success by boosting labor productivity, improving efficiency, and reducing labor costs. This leads to higher profits, better liquidity, and a reduced need for external financing.
Interdependence with other key business functions
How does marketing contribute to the finance function?
Marketing generates revenue through sales, which improves profitability, liquidity, and growth. It also enhances the business’s ability to raise funds for future expansion through improved financial performance and shareholder confidence.
Interdependence with other key business functions
How does Qantas’ operations function depend on finance?
Qantas’ operations rely on finance to fund capital expenditures such as new aircraft, maintenance facilities, and airport lounges. Finance also sets budgets and cost controls for operational departments.
How does Qantas’ marketing function depend on finance?
Qantas’ marketing function depends on finance to fund promotional campaigns and allocate funds for specific business segments. Finance assesses marketing strategies through financial criteria like sales, market share, and profitability analysis
