Processes of financial management Flashcards
What does planning and implementing involves
- the setting of goals and objectives
- determining the strategies to achieve these goals and objectives
- identifying and evaluating alternative purses of action
- choosing the best alternative for the business.
what are the financial needs of a business
The size of the business
Stage of the business life cycle
Capacity to source finance
Management skills
Future growth plans of the business
what are budgets
Budgets provide information in quantitative terms
Budgets can show the following; cash required, expenditure expectations and forecasted revenue
- Budgets enable businesses to perform the control function, as they allow management to determine if objectives are being met
what are record systems
Record systems are the mechanisms employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible
what are financial risks
- unable to cover its financial obligations
- being unable to cover debt
- not maintaining solvency / liquid
what are financial controls
Policies and procedures that ensures that the plans of a business will be achieved in the most effective way
what is monitoring and controlling involve
- cash flow statement
- income statement
- balance sheet
define monitoring
Monitoring - the process of measuring actual performance against planned performance
define controlling
Controlling - involves the comparison of planned performance against actual performance and taking corrective action to make sure the objectives are attained
what is a cash flow statement
Financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time
- show if a business can meets its financial commitments
what is a income statement
Shows the operating results for a period. It shows the revenue earned and expenses incurred over the accounting period with the resultant profit or loss
what is a balance sheet
Represents a business’s assets and liabilities at a particular point in time, expressed in money terms and represents the net worth of the business
what is the ratio for liquidity
current ratio
- higher the better
- balance sheet
- measures the ability of the business to pay its short term debts when they fall due
what is the solvency / gearing ratio
debt to equity ratio
- balance sheet
- lower the better
- ability of a business to pay its debts in the long term
profitability ratios: Gross Profit
- revenue statement
- %
- percentage of each dollar that is GP
- higher the better
profitability ratio; Net Profit
- revenue statement
- %
- percentage of each dollar that is net profit
- higher the better
profitability ratio: return on equity
- revenue statement + balance sheet
- how much the owners investment in the business is earning
- %
- higher the better
efficiency ratio: Expense ratio
- revenue statement
- %
- percentage of sales that are taken or absorbed by expenses
- lower the better
efficiency ratio: Account receivable turnover ratio
- revenue statement + balance sheet
- how efficient the business is in collecting its account receivable
- number of dats to collect debt
- under 30 days = good
comparative ratio anaylsis
- ‘snapshot’ of a particular point in time
- identify trends
COGS formula
opening stock + purchases - closing stock
Gross Profit formula
sales - COGS
Net profit formula
gross profit - expenses
Assets formula
liabilities + owners equity
Limitations of financial reports acronym
N - normalised earnings
C - capitalising expenses
V - valuing assets
T - timing issues
D - debt repayment
N - notes to the financial statement
Define normalised earnings
Process of removing one time or unusual influences from the balance sheet to show the true earnings of a company
Creates a picture of what the business performs like on a normal day to day basis
define timing issues
Financial reports cover activities over a period of time ( usually a year ) - hence, the business financial position may not be a true representation if the business has experienced seasonal fluctuations
Eg. selling particular assets on purpose to improve financial position
What are the ethical issues
debt funds
ethical consideration
ASX
how is debt funds an ethical issue
If debt funds are used extensively to finance activities in a business, although debt funds may be used to increase profits, there is added risk for shareholders.
In terms of ethical consideration, directors have a duty to …
Act in good faith
Exercise power for proper purpose in the name of the corporation
Exercise discretion reasonably and properly
Avoid conflicts of interest
how does the ASX link to ethical issues
The australian securities exchange corporate governance council officiates the requirements of corporations listed with the ASX and their responsibilities in regard to compliance with law, disclosure and transparency of company details to shareholders and the public.
