Financial Management Flashcards
What are the specific roles within the business of financial management?
Assessing and communicating information about the financial position of the business to stakeholders (i.e preparing financial statements)
Determining financial needs and sourcing required funds (i.e obtaining finance)
Managing the financial resources to preserve and increase value and prevent losses.
Define financial management
The activities within a business to determine and provide for the financial needs of the business. It involves planning, organising and controlling the financial assets of the business in order to achieve business goals.
A business with ineffective financial management will have:
Insufficient capital for expansion
Cash flow problems and difficulties in paying debts when they fall due.
Cost overruns.
Poor gearing leaving the business vulnerable to interest rate changes.
Poor mix of assets and finance.
What are the objectives of financial management?
Liquidity Solvency Efficiency Profitability Growth
What is liquidity?
Having sufficient cash and current assets that give the business the ability to pay debts on time
What is solvency?
Maintaining financial stability in the longer term through an appropriate financial structure that does not expose the business to unnecessary risk.
What is profitability?
To increase the amount of money earned by the business through higher sales and lower expenses resulting in higher returns on investment in the business.
What is efficiency?
Gaining the maximum output from financial resources in order to minimise wastage and costs.
What is growth?
To increase the financial assets and size of the business.
Define interdependence
The concept where two things rely on and impact each other
How is finance interdependent with the other functions?
The other functions rely on it to proved them with money.
The thee functions can impact finance through the projects they run and the funds they require.
What can a business use when collecting financial information?
Balance sheets, income statements, cash flow statements, budgets, bank statements, weekly sales reports or break even analysis
What are record systems?
The structures and systems used by a business to ensure that all data is recorded in an accurate and reliable manner
What are some common financial controls?
Clear authorisation and responsibility for tasks, control of use of cash registers, payments made by cheque not cash, regular audits of assets
What are the advantages of debt finance?
Funds are readily available, increased funds should lead to increased earnings and profits, tax deductions for interest payments
What are the disadvantages of debt finance?
Increased risk because of interest and added fees, security may be required, regular repayments have to be made, lenders have first claim on any money if the business ends in bankruptcy
What are the advantages of equity financing?
Does not have to be repaid unless owner leaves business, cheaper with no interest, owners who contributed retain control over how it is used, low gearing and less risk
What are the disadvantages of equity financing?
Lower profits and lower returns for the owner and owners may have a high expectation of return that they will earn on the investment
What needs to be considered when matching the terms and sources of finance to business purpose?
The terms of finance (short or long term), the cost of each source of funding, structure if the business (small businesses have few opportunities for equity capital) and availability (how quickly and easily can the business access finance
What are examples of internal sources of finance?
Capital and retained profits
What are examples of external sources if finance?
Short term loan, long term loan and new equity
How do financial institutions impact on business financial performance?
Influence the availability and cost of funds; provide opportunities for businesses to increase financial returns
What are seven types of financial institutions?
Banks, investment banks, finance companies, insurance companies, superannuation funds, unit trusts and ASX
How can he government influence financial management?
ASIC and company tax
