Finance - Role of financial management

Question 1

Financial management

Answer 1

the planning and monitoring of a business’s financial resources to enable the business to achieve its financial objectives.

Question 2

Strategic role of financial management

Answer 2

to ensure that a business achieves its goal and objectives, by ensuring the businesses finances are managed effectively.
➢ setting financial objectives and ensuring the business is able to achieve these goals
➢ sourcing finance
➢ preparing budgets and forecasting future finances
➢ preparing financial statements
➢ maintaining sufficient cashflow
➢ distributing funds to other parts of the business

Question 3

Profitability

Answer 3

excess of revenue or income over expenses or costs. Satisfy owners in short term and sustainability of firm in long term

Question 4

Growth

Answer 4

ability of the business to increase its size in the longer term, this depends on ability to develop and use its asset structure to increase, sales profits and market share. Ensures that business is sustainable into future.

Question 5

Efficiency

Answer 5

ability of business to minimise its costs and manage its assets so that the maximum profit is achieved with the lowest level of assets.

Question 6

Liquidity

Answer 6

is the extent to which a business can meet its financial commitments in the short term ( less than 12 months)

Question 7

Solvency

Answer 7

extent to which the business can meet its financial commitments in the longer term ( more than 12 months). Provides indication of risks of investment to potential investors.

Question 8

Solvency - Gearing

Answer 8

proportion of debt ( external finance) and the proportion of equity ( internal finance). That is used to finance business activities.

Question 9

Short term financial objectives

Answer 9

tactical ( one to two years) and operational ( day to day) for plans for a business. Are needed in order to achieve long term goals.

Question 10

Long term financial objectives

Answer 10

strategic plan of a business, determined for set period of time normally 5+ years. Goals such as increase market share and increasing profit. Business will review changes annually to determine if changes need to be implemented.

Question 11

Interdependence with other key business functions

Answer 11

– Operations, human resources, and marketing all require financial managers to allocate adequate funds.
– Operations funds to carry out transformation processes, marketing funds to undertake forms of promotion, human resources funds to pay for staff.
Each of these functions generate sales and therefore provide income to finance department.