Study unit 7 The financial function and financial management Flashcards
Stakeholder
The word “stakeholder” refers not only to the owners and/or the shareholders of a business enterprise, but also to the investors of loan capital and, more importantly, the employees of the enterprise.
To contribute to the goal of creating wealth, the financial manager must:
- cost effectively obtain the funds needed for the enterprise
- invest those funds in assets that will give the highest possible return
- analyse, plan and control the flow of funds as accurately as possible
Balance sheet
There are two major sides: assets on the left, and owner’s equity and liabilities on the right.
Assets
Assets refer to the “possessions” of the enterprise while liabilities refer to the “debts”.
Equity
Equity refers to the money invested by the owner(s) of the enterprise. Ordinary equity does not have to be paid back to the shareholder at a specified date and no interest on the equity is payable.
Fixed assets and Current assets
Fixed assets (also called non-current assets) are long term whereas current assets are more short term. Typical current assets are cash inventory (stock) and accounts receivable. The expectation is that inventory and accounts receivable will be converted into cash during the next accounting period.
Long term liabilities and current liabilities
In the same way there are long-term liabilities and current liabilities, for example a mortgage bond that is usually repaid over 20 years and bank overdrafts that are paid within a year.
Shareholders’ funds can be split into
Ordinary share equity and preference share capital.
Owners equity
Owners’ equity refers to ordinary shareholding (remember that the ordinary shareholders are the owners of the enterprise), and undistributed profits and reserves. In the balance sheet total assets must always equal equity plus liabilities.
Total Cost vs Cost per unit
So to determine the cost per unit you have to divide the total costs by the number of units produced.
If an enterprise’s total cost is R240 000 and it manufactures 80 000 products (units), then the cost per unit will be R240 000 ÷ 80 000 = R3.
Fixed Costs
Fixed cost refers to depreciation, interest, salaries, rent, or lease instalments for example, which will not change regardless of the number of units manufactured and sold.
Variable cost
Variable cost refers to the costs which will increase with every additional unit manufactured and sold, for example the raw materials that went into the product and the packaging material. It follows that the greater the number of units manufactured, the higher the total variable cost will be.
Income State
The income statement indicates the make-up of the profit or loss for the particular period.
The long-term objective
The long-term objective of the business should be to increase its value. This will be achieved by investing in assets that add value and by keeping the cost of capital of the business as low as possible.
The short-term financial objective
The short-term financial objective should be to ensure the profitability, liquidity and solvency of the business. Financial management is based on the risk-return principle (the higher the risk taken, the higher the expected return), the cost-benefit principle (discussed in section 7.4 below) and the time value of money principle (discussed in section 7.5 below).
