Role of Financial Management Flashcards
Strategic role
To make funds available for (b) activities + ensure day-to-day transactions and operations run smoothly
Includes:
- Setting financial objectives and ensuring these are achievable
- Sourcing finance/acquiring additional financial resources
- Preparing budgets, forecasting future financial outcomes, preparing financial statements
- Maintaining sufficient cash flow
- Benefit shareholders in long term
- Navigate declining sales and profitability
- Maintain competitiveness
Objectives of financial management - profitability
- Ability of the (b) to maximise profits - through decreasing costs and increasing sales
- Profits satisfy owners and shareholders in the short-term
- important for the long-term sustainability of a firm - is a long-term goal
Objectives of financial management - growth
- Ability of the (b) to increase its size in the long term e.g. can be growth in profit, sales, market share, productivity
- Depends on ability of (b) to develop and use its asset structure to increase sales, profits and market share
- ensures (b) is sustainable in the future - don’t want to grow too fast (won’t have the resources e.g. Donut Time,)
Objectives of financial management - efficiency
- Ability of the (b) to minimise its costs and manage assets so that max profit is achieved with the lowest possible level of assets
- (using resources effectively (to the best possible adv e.g. using employees etc)
- to reduce costs, waste, lead times = operate effectively, competitively
- Maximising the outputs relative to the inputs in the business i.e. getting the most for your dollar
Objectives of financial management - liquidity
- extent to which a (b) can meet their short term financial commitments (<12 mths) - ability to pay short term debt
- Must have sufficient cash flow or be able to convert current assets into cash quickly (by selling inventory)
- shows (b) how able it is to pay its current debts as they fall due –> allows (b) to maintain a good credit rating, and avoid late fees and additional interest payments
Objectives of financial management - solvency
- Extent to which (b) can meet its long-term financial commitments (>12 months) / cover its long-term liabilities
- r/s or ratio b/w debt (owe) and equity (own)
- Important to owners, shareholders and creditors because it is an indication of risks to their investment
- Gearing is the proportion of debt and equity used to finance the (b)’ activities
- e.g. highly geared = lots of debt - risk of becoming insolvent, low geared = limited debt - solvent
Objectives of financial management - short term and long term
Short term
- are tactical (1-2 years) and operational (day to day) plans of a (b)
- should be reviewed regularly to ensure targets are being met + determine if efficient use of resources
Long term
- the strategic plans of a (b), generally 5 or more years
- each requires a set of short term goals to assist in its achievement - progress is reviewed annually
- e.g. increase profit and market share
WHY THEY MIGHT CONFLICT
e.g. Aim for long-run higher profit through more sales. In the short run = requires purchase of stock = may reduce her liquidity. Hence, her long-term goal of higher profit
conflicts in the short run with liquidity.
Interdependence with other KBF’s
- Finance supplies money to each of the KBFs = in return able to make (b) more profitable, giving more money to the finance team
- Operations require funds to purchase inputs and carry out the transformation process
- Marketing requires funds for various forms of promotion → undertake market research + develop a marketing plan
- HR require funds in order to pay for staff
Finance department also relies on the other (b) functions to provide income: - Relies on operations to produce products
- Relies on marketing to generate sales and therefore revenue for finance = responsible for budgeting whole (b) - inclu providing funds to marketing for research
- Relies on HR to manage staff
