Role of Financial Management

Question 1

What is the Strategic role of financial management?

Answer 1

The role of financial management is the process of determining and managing the financial resources required to achieve business objectives and goals.

Question 2

Profitability: What and How?

Answer 2

Refers to the money a business makes from its operations after all expenses have been accounted for.
How - Maximising profitability involves maxing sales, increasing rev by changing marketing, price, costs/expense

Question 3

Efficiency: What and How?

Answer 3

(expenses/revenue): The ability of a firm to maximise the return from assets with minimal costs.
How - Achieving the firm’s objectives without wasting resources

Question 4

Growth: What and How?

Answer 4

The ability of a business to expand its activities
How - Increase production - higher sales - expand product range
Businesses can achieve elements of growth on their own (increase physical capacity by increasing size of premises, adopt strategies to increase sales, increase market share, expand overseas through exporting) or by acquiring/merging

Question 5

Solvency: What and How?

Answer 5

Solvency: Extent to which the BUS can meet financial commitments in long term (12months>)
How - Measured by debt/equity (you want 0.6-1:1 ratio at least, it’s the benchmark)

Question 6

Liquidity: What and How?

Answer 6

Liquidity: Ensuring the business has enough cash to fund its day to day activities. The quicker an asset can be turned to cash the more liquid it is (cash in a bank very liquid).
How - Measure by CA/CL. 2:1 ratio is the benchmark

Question 7

What are Short term goals?

Answer 7

Short Term: Tend to include one to two years, reviewed regularly to ensure achievement
Profitability = ST and LT Efficiency = ST Liquidity = ST

Question 8

What are long term goals?

Answer 8

Long Term: Covers more than 5 years in time, broader goals reviewed annually.
Profitability = ST and LT Growth = LT Solvency = LT

Question 9

Interdependence with other key business functions

Answer 9

HR:Sets the costs that can be spent on wages, incentives and other monetary awards, funds training
Operations: Funds production, production targets and cost to make profit, Monitor performance
Marketing: Costs associated with market research, sets budget for promotion, seats sales targets