Role of Financial Management

Question 1

What is the strategic role of finance?

Answer 1

Organising the finances of business so they can operate in the short-term and continue to grow in the long-term

Question 2

What is the profitability financial objective?

Answer 2

Business’s ability to maximise its profits

Question 3

What is the growth financial objective?

Answer 3

Business’s ability to increase its size/value over the long-term

Question 4

What is the efficiency financial objective?

Answer 4

Business’s ability to maximise its asset use in the most cost-effective way

Question 5

What is the liquidity financial objective?

Answer 5

Business’s ability to meet its short-term financial commitments

Question 6

What are short-term financial commitments?

Answer 6

Commitments needing to be paid within 12 months

Question 7

How do you know if a business is liquid?

Answer 7

Does the business have enough current assets to pay off its current liabilities?

Question 8

What is the solvency financial objective?

Answer 8

Business’s ability to meet its long-term financial commitments

Question 9

What are long-term financial commitments?

Answer 9

Commitments where payment deadlines exceed 12 months

Question 10

How do you know if a business is solvent?

Answer 10

Does the business have enough non-current assets to pay off non-current liabilities?

Question 11

What is an suitable acronym for the 5 financial objectives?

Answer 11

PGELS

Question 12

How do you maximise profits?

Answer 12

Maximise revenue and minimise costs

Question 13

Why is the growth financial objective important?

Answer 13

Business think sustainably for future success

Question 14

How does the efficiency financial objective work?

Answer 14

Maximise output while minimising inputs

Question 15

What are short-term objectives?

Answer 15

Operational/tactical plans of a business

Question 16

What does operational plans refer to?

Answer 16

Day-to-day basis

Question 17

What does tactical plans refer to?

Answer 17

1-2 years

Question 18

What are long-term financial objectives

Answer 18

Strategic plans of a business

Question 19

How long are strategic plans?

Answer 19

5+ years

Question 20

Provide an example of short-term objectives

Answer 20

Burger business wanting to sell 400 burgers a day (profitability)

Question 21

Provide an example of a long-term objective?

Answer 21

Burger business wanting to open 10 restaurants in 5 years (growth)

Question 22

Give an example of how short and long-term objectives conflict?

Answer 22

Burger business needs a warehouse. Renting will be cheaper in short-term, improving profitability, but affecting long-term growth due to the warehouse being a liability (no future value). On the other hand, buying will help long-term growth due to the warehouse holding value as an asset, but affecting short-term profitability due to a large upfront cost.