ROFM - financial objectives and their potential conflict

Question 1

objectives of financial management

Answer 1

o	Liquidity 
o	Solvency 
o	Profitability 
o	Efficiency 
o	Growth

Question 2

liquidity

Answer 2

The extent to which a Business can meet its financial commitments in the short term

must have sufficient cash flow to meet them or be able to convert current assets into cash quickly

requires control over the flow of cash inflow and outflows to ensure that is has supplies of cash when needed. Cash shortfalls and excess or idle cash must be avoided

Question 3

solvency

Answer 3

The extent to which the business can meet its financial commitments In the longer term

important to the owners, shareholders and creditors of a business because It is an indication of risk.

Indicates whether a business will be able to repay amounts that have been borrowed for investments in capital (such as equipment and machinery)

Gearing measures the percentage of the assets of the business which are funded by internal and external finance.

Question 4

Profitability

Answer 4

The extent to which a business can increase the amount of money earned through higher sales and/or lower expenses

satisfies owners of shareholders in the short term but important for the longer term sustainability of a firm

A business must carefully monitor its revenue and pricing policies its expensive and inventory levels

Question 5

efficiency

Answer 5

The extent to which a business can gain the maximum output from the fewest financial resources In order to minimise wastage and costs

requires a firm to have control measure’s in pace to monitor assets.

A business that aims for efficiency must monitor the levels of inventories and cash and the collection of accounts receivable (money owed)

Question 6

growth

Answer 6

The ability of the business to increase its size and the size of its financial assets in the longer term

It depends on businesses ability to develop and use its asset structure to increase sales, profits and market share

Growth ensures that the business is sustainable into the future

Question 7

Short term

Answer 7

objectives may be part of day-to-day operations or tactical plans up to a year and regularly reviewed

Short term financial objectives are essential to assisting in the achievement of long term objectives

Question 8

long term

Answer 8

far more strategic and would be embedded as part of the 3-5 year plan

They would be annually reviewed