Finance - Role of financial management

Question 1

define financial management

Answer 1

the planning and monitoring of a businesses financial resources to enable the business to achieve it financial objectives

Question 2

what is the long term/ strategic role of finance management

Answer 2

The long term or strategic role of financial management is to ensure that a business achieves its goals and objectives - this can only be accomplished if the businesses’ finances are managed effectively
- Setting financial objectives and ensuring the business is able to achieve these goals
- Sourcing finance
- Preparing budget and forecasting future finances
- Preparing financial statements
- Maintaining sufficient cash flower
- Distributing funds to other parts of the business

Question 3

what are the 5 main financial management objectives

Answer 3

profitability, growth, efficiency, liquidity, solvency

Question 4

define profitability

Answer 4

the ability of a business to maximise its profits - to ensure that profit is maximised, a business must carefully monitor its revenue and pricing policies, costs and expenses

Question 5

define growth

Answer 5

the ability of a business to increase its size in the long term - Growth of a business depends on its ability to develop and use its asset structure to increase sales, profits and market share

Question 6

define efficiency

Answer 6

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

Question 6

define liquidity

Answer 6

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

Question 7

define solvency

Answer 7

is the extent to which the business can meet its financial commitments in the short term (less than 12 months) and the long term (more than 12 months) - indication of the risks of their investment

• measured through gearing