Processes of Financial Management Flashcards
What are the steps of financial planning
- Determing financial needs
- Developing budgets
- Maintaining record systems
- Identifying financial risks
- Establsihing financial controls
What forms basis of financial plan
Situtational analysis
Where does data for analysis come from
The financial statements
What determines a business’s financial needs
- Size of the business
- Current phase of the business cycle
- Future plans for growth and development
- Capacity to source finance – debt and/or equity
- Management skills for assessing financial needs and planning
What is a budget
A plan predicting revenue an expense of a business for a future time period
What does a budget provide
Information in quantitative terms about requirements to achieve a particular purpose
How does a budget act as a control measure
Allows businesses to compare planned performance against actual performance and taking corrective action when needed
What are three types of budgets
- Operating
- Project
- Financial
What is a operating budget
Budget concerned with main activities of a business such as sales
What is a project budget concerned with
- Capital expenditure and R&D
- Includes information on purpose of asset purchase and revenue generated from purchase
What is a financial budget
- Relates to financial data of the business
- Predictions of operating and project budgets are included in the budgeted financial statements
Example of a budgeted income statement
What are record systems mean
The mechanisms that ensure data is recorded & the information provided is accurate, reliable, efficient & accessible
Example of record systems
Paper based journals or electronic
What do record systems store
Data such as sales, expenses, assets, liabilities and customer, supplier and product information
What is a financial risk
The risk that a financial decision will result in a financial loss
If a business cannot meet its financial commitments what will it become
Insolvent
What are the steps to minimise risk
- Profit generated must be sufficient to cover cost of debt as well as increasing profits to justify the risk taken by the business owner.
- Consideration must also be given to the liquidity of a business’s assets à there must be sufficient liquid assets (cash) to cover interest and principal repayments
What are financial controls
Financial controls are the policies and procedures that ensure the plans of a business will be achieved in the most efficient way.
What are exmaples of policies and procedures that ensure business plans are achieved in most efficient way
- Clear authorisation for tasks in the business
- Separation of duties
- Control of cash
- Protection of assets
Examples of controls
- Budgets
- Cash flow statements
- Income statements
- Balance sheets
What is debt finance
Debt finance relates to the short term and long term borrowing from external sources by a business
What is equity finance
Equity finance relates to the internal sources of finance in the busines
What are advantages of debt financing
- Will not dilute current ownership of the business
- Funds are readily available and can be acquired at short notice
- Increased funds should lead to increased earning and profit
- Flexible payments and types of debt are available
- Interest payments are tax deductible
- Profits are not shared with lender of loan