Role of Financial Management Flashcards
What is financial management
The planning and monitoring of a business’s financial resources in order to allow the business to achieve its financial goals.
What does strategic role of financial management involve
- Setting financial objectives and ensuring business meets them
- Determining mix of debt and equity financing
- Preparing budgets and forecasting future finances
- Maintaining sufficient cash flow
- Distributing funds
- Managing tax
What are the objectives of financial management
- Profitbaility
- Growth
- Efficiency
- Liquidity
- Solvency
Define profitability
The ability to make a financial return from business activities
Define business growth
The ability of a business to increase its size and value in the longer term
What are two types of growth
Internal and External
What is internal growth
Growth within the business and comes as a result of increased demand, increased productivity and increased market opportunities
What is external growth
Growth achived through the purcahsing of another business i.e. merger or acquisition
What can too much growth too fast lead to
Cash flow problems
Define efficiency
Ability of a business to minimise its costs and manage its assets so that maximum profit is achived with lowest level of assets
Which business function does efficiency relate to
Operations function
What does improved efficiency lead to
Higher profits
What is liquidity
The extent to which a business can meet its financial commitments in the short-term (less than 12 months
What is word for short-term debt on balance sheet
Current liabilities
What is short-term assets on balance sheet
Current assets
What are current assets
Assets that can be converted to cash within a year
Example of current assets
- Cash
- Stock
- Accounts receivable
Example of current liabilities
- Bank overdrafts
- Accounts payable
what is working capital
amount of funds required by a business to meet its short-term debts
What is working capital
Current assets - Current liabilities
What is solvency
The extent to which the business can meet its financial commitments in the longer term (i.e. Period greater than 12 months)
What does solvency indicate
Solvency indicates whether a business will be able to repay amounts that have been borrowed for investments in capital
What are short-term financial objectives
The tactical (one or two years) and operational (day-to-day) plans of a business
What are long-term financial objectives
The strategic plans of a business and are determined for a set period of time, generally more than 5 years. Usually centred on growing the business
Example of how long-term and short-term goals connect
Long-term objective of profitability and solvency and short-term objective of managing cash-flow and repaying debts
Why does conflcit arise between long-term and short-term goals arise
Conflciting Interests of stakeholders
Example of conflcit between short- and long-term objectives
Long term objective of growth (increases costs and gearing which may lead to lower overall profits in the short term).
Role of financial department in relation to other business functions
Financial managers must allocate other departments funds
How are marketing and finance related
Marketing requires funds to undertake promotion
How are operations and finance related
Operations requires funds to purcahse inputs and carry out transformation process
How are HR and finance related
HR requires funds in order to pay staff
Why is liquidity an objective of financial management
- Liquidity is ability for a business to meet its short term financial committments
- Important for financial mangagers as liquidity relates to a businesses cash flow and ability to pay its accounts payable
