M2-Topic 1 role of financial management Flashcards
what is financial management
the planning and monitoring of a business’s financial resources
why is financial management important
careful financial management is important if a business if it is to achieve its financial objectives.
what are strategic goals
they are long term broad aims for the business
what is the strategic role of financial management
ensuring available funds for the smooth operation of all business activities.
how does finances achieve their strategic role (4)
setting achievable financial objectives
preparing budgets
forecast future finances
maintaining sufficient cash flow
what are the 5 objectives for financial management
profitability
growth
efficiency
liquidity
solvency
what is profitability
earning performance of business + capacity to use resources to maximise profit
what variables must be watched to monitor profitability(5)
revenue
pricing policies
costs
expenses
inventory level of assets
what is growth
the ability of the business to increase in size in the long term
what is efficiency
the ability of the business to minimise its costs and manage its assets.
what variables must be watched to monitor profitability (3)
levels of inventories
cash
the collection of receivable
what is liquidity
the extent to which a business can meets its short term financial commitments
how can a business meets its financial commitments(2)
have sufficient cash to pay it off
converting current assets into cash quickly(selling inventory)
what is solvency
the extent to which the business can meet its long term financial obligations
what is the importance of managing solvency
it is the indication to shareholders and potential shareholders of the risk in their investment
