Objectives of Financial Management

Question 1

What does a ‘strategic plan’ refer to?

Answer 1

A long-term plan (5-10 yrs) for a business that outlines its future direction

Question 2

What are the objectives of financial management?

Answer 2

Profitability

Growth

Efficiency

Liquidity

Solvency

Question 3

Define profitability

Answer 3

The earnings of the business after expenses have been paid

Question 4

How is profitability measured?

Answer 4

Net Profit

Question 5

Where can profitability be found on financial statements?

Answer 5

Gross Profit (Income Statement)

Net Profit (Income Statement)

Earnings Before Interest & Tax (Income Statement)

Question 6

What is gross profit?

Answer 6

Sales revenue minus cost of goods sold (wholesale costs and transport costs)

Question 7

What is net profit?

Answer 7

The final amount of revenue remaining after all expenses have been paid?

Question 8

Why is EBIT (earnings before interest & tax) a more precise measure of profitability than net profit?

Answer 8

Because it measures the profit made directly from the operations of the business

Question 9

Why is profitability desireable?

Answer 9

Because it is the function of a business - to make a return for the investment of its owner

(And because capitalism, duh)

Question 10

Define growth

Answer 10

The size of the business compared to competitors in the same market

Question 11

Why is growth desireable?

Answer 11

A business that grows will increase its size and therefore its profitability in the long-term

Question 12

How can growth be achieved?

Answer 12

Increasing the physical size of the business

Increasing market share through business expansion

Increasing the value of the assets in the business

Question 13

Define efficiency

Answer 13

The achievement of maximum output with the minimum level of inputs

Question 14

Why is efficiency desireable?

Answer 14

When a business decreases its costs, it increases its profit

Question 15

How can efficiency be measured?

Answer 15

An expense ratio (total expenses/total sales)

The business’s ability to collect its accounts receivables (accounts receivables turnover ratio)

Question 16

Define liquidity

Answer 16

A measure of how quickly a current asset can be converted into cash

Question 17

What are current assets?

Answer 17

Assets expected to be used, sold or converted into cash within 12 months

They include cash at the bank, accounts receivable and stock

Question 18

Why is liquidity important?

Answer 18

It determines the ability of a business to pay short term debts (current liabilities) as they fall due

Question 19

What are current liabilities?

Answer 19

Debts that are due to be repaid within 12 months

Question 20

What is the danger of a business with low liquidity?

Answer 20

If it cannot pay its short term debts, as business may:

• Have its facilities disconnected
• Find suppliers do not wish to trade with it
• Its credit rating will fall

Question 21

What is the danger to a business of having too high liquidity?

Answer 21

If a financial manager decides to keep a lot of cash in the business bank account, they will be wasting financial resources and losing potential profits

Question 22

Define solvency

Answer 22

The ability of a business to pay both short and long term liabilities as they fall due

Question 23

Why is solvency important?

Answer 23

It is a measure of whether a business is financially stable

Question 24

What does gearing refer to?

Answer 24

How much debt finance the business has acquired to fund its operations compared to its use of equity finance

Question 25

What makes up the triple bottom line for businesses?

Answer 25

Financial Achievements (Profit & Growth)

Social Concerns

Effect on the natural environment