Processes of Financial Management 1 Flashcards
Planning and Implementing Cycle (DDMIE)
- Determining Financial Needs
- Developing Budgets
- Maintaining Record Systems
- Identifying Financial Risk
- Establishing Financial Control
Financial Needs
Money required to put business plans in action
- Involves proposed sources of finance, use of financial reports
Developing Budgets
How much will the business sell, expenditure, etc
- Enable monitoring, planning, controlling
- Involves operating, project and financial budgets
Maintaining Record Systems
Data is carefully recorded so management decisions are accurate, reliable, efficient
- Without accurate records = restricted understanding of financial performance
Identifying Risk
Consider risk in decisions
- Credit Risk
- Market Risk
- Liquidity Risk
- Operational Risk
Establishing Financial Control
Procedures, policies, systems developed to monitor and control assets
- Can involve separation of duties, protection of assets, qualifications of employees
Debt Finance
Short and Long Term sources of external finance
- E.g Overdraft, mortgage,
Debt Finance Advantages
- No change in ownership
- Easy and quick to obtain funds
- Increased funds can lead to increased profits and earnings for business
Debt Finance Disadvantages
- Expensive due to need to repay debt and interest
- Security (collateral) is required by business
- Regular repayments, increasing expenses in a period
Equity Finance
Internal Sources of finance for business
Equity Finance Advantages
- Cheaper than other sources of Finance
- Less risk (no need to repay)
- Owners who contribute the equity control how it is used
Equity Finance Disadvantages
- Finite amount, which can cause lower profits due to limited amount
- Longer, more expensive process to get funds
- Diluted ownership
Matching the Terms and Sources of Finance to business purpose
Factors to Consider
- Set Up Costs
- Interest Costs
- Avaliability of Funds
- Flexibility of Funds
- Level of external control
Matching the Terms and Sources of Finance to business purpose (example)
Using short term debt finance to fund current / short term situations
- Not using a long term finance like a mortgage to fund a short term asset (because mortgage will still incur expenses after the purchase)
Monitoring
Checking progress against benchmarks or goals
Controlling
Taking action to move closer to benchmarks or goals
Cash Flow Statement
Measure movements of cash inflows / outflows during a period
CFS Benefits
- Can be used to identify trends
- Can be used to tell if financial obligations can be met (liquidity), or enough funds for future expansion
- Can be used to see if cash flow is sufficient (or need external finance)
Income Statement
Measures profitability over a period, allows owners to see how much revenue and expenses were incurred
Balance Sheet
Measures the assets, liabilities, and owner’s equity over a period, shows the financial stability
Balance Sheet Indications
If the business:
- Has enough assets to cover debt (interest, funds)
- Is using assets to maximise profits
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