Role of financial management
Financial Management- The planning and monitoring of a businesses financial
resources to enable the business to reach its financial goals. E.g. what funds are
needed, how a business pays for machinery and stock and how their funds are used.
Strategic role of financial management- Makes sure that the resources needed to
achieve business financial goals are available,
e.g. the resources needed are purchased and financed for when they’re needed.
long-term planning and decision-making processes aimed at achieving a business’s
financial goals.
It involves managing financial resources in a way that supports the overall strategy
and objectives of the business.
Strategies for managing financial resources-
- Monitoring a businesses cash flow
- Paying its debts
- Developing financial control techniques
- Auditing of financial accounts
- Continuing to make profits for its owners and shareholders
Business long term goals- maximise profit, increase market share, improve share
price
Objectives of financial management (PLEGS)-
Profitability(short term objectives)- What remains from revenue after all expenses
have been paid. Is important to ensure owners receive a return on their investments
into the business after paying for all their expenses. Business must carefully watch
its revenue, cash flow, pricing policies, and costs and expenses.
Liquidity(short term expenses)- How quickly a business's assets can be turned into
cash and therefore pay their short term debts (less than 12 months) on time. The
ability for a business to pay its debts as soon as they fall due. It Is important because
it ensures you are able to pay for your day to day operations.
Efficiency(long term objectives)- Producing the same or more outputs using less
resources. This is important because profitability increases. Ability for a business to
minimise costs and manage assets so that maximum profit is reached with the
lowest level of assets.
Growth(long term objectives)- To increase customer base, sales, market share,
profitability, number of stores, growth in production range, growth in employees.
,Solvency(long term objectives)-The ability of a business to pay their long term debts
on time. The extent to which the business can meet its financial objectives in the
long term. It's important to ensure the business continues operating to avoid
additional fees and penalties.
Dividend- return on your own investment, a payment thats divided across the
owners
Short term objectives- (12 months) cash flow
Long term objectives- (3 years or more) solvency, growth
Conflicting objectives-
- (Profitability and growth in the short term) For a business to grow this requires
a higher expense due to the cost of growing into different franchises, getting
more stock and developing new products which causes profitability to
decrease in the short term.
Interdependence with other key business functions
Influences on financial management
Internal sources
Internal finance comes either from the business’s owners (equity or capital) or from
the outcomes of business activities (retained profits).
Owners equity- the funds contributed by owners or partners to establish and build
the business.
Retained profits- is when all profits aren’t distributed, but are kept in the business as
a cheap and accessible source of finance for future activities. The business owner
reinvests it into the business
, External sources
External finance refers to the funds provided by sources outside the business,
including banks, other financial institutions, government, suppliers or financial
intermediaries.
Finance provided from external sources through creditors or lenders is known as
debt finance.
Types of short term borrowing: (COF)
Commercial bills:
- Bill exchange (document ordering the payment of a certain amount of money
at a fixed future date) issued by institutions other than banks and given a large
amount (usually over $100,000 for a period between 90-180 days)
- Borrower receives money immediately and must pay money back with
interest at a future time
Pros
- Used to cover short term expenses
- Cheaper form of finance
- Interest is tax deductible
- Receive funds immediately
Cons
- Interest
- Impacts profitability and liquidity of the business
Overdraft:
- Bank allows business to overdraw its account to an agreed limit
- Assists the business with short term liquidity problems
- Costs are minimal, interest rates are low and more flexibility
Positives of overdraft
- Short term needs (to boost cash flow)
- Interest paid is tax deductible
- Quick access to funds
Negatives of overdraft
- High rates of interest and account fees
- Impacts liquidity and profitability of the business
Factoring:
- Selling the money a customer hasn't paid at a reduced price to a factoring
company
Financial Management- The planning and monitoring of a businesses financial
resources to enable the business to reach its financial goals. E.g. what funds are
needed, how a business pays for machinery and stock and how their funds are used.
Strategic role of financial management- Makes sure that the resources needed to
achieve business financial goals are available,
e.g. the resources needed are purchased and financed for when they’re needed.
long-term planning and decision-making processes aimed at achieving a business’s
financial goals.
It involves managing financial resources in a way that supports the overall strategy
and objectives of the business.
Strategies for managing financial resources-
- Monitoring a businesses cash flow
- Paying its debts
- Developing financial control techniques
- Auditing of financial accounts
- Continuing to make profits for its owners and shareholders
Business long term goals- maximise profit, increase market share, improve share
price
Objectives of financial management (PLEGS)-
Profitability(short term objectives)- What remains from revenue after all expenses
have been paid. Is important to ensure owners receive a return on their investments
into the business after paying for all their expenses. Business must carefully watch
its revenue, cash flow, pricing policies, and costs and expenses.
Liquidity(short term expenses)- How quickly a business's assets can be turned into
cash and therefore pay their short term debts (less than 12 months) on time. The
ability for a business to pay its debts as soon as they fall due. It Is important because
it ensures you are able to pay for your day to day operations.
Efficiency(long term objectives)- Producing the same or more outputs using less
resources. This is important because profitability increases. Ability for a business to
minimise costs and manage assets so that maximum profit is reached with the
lowest level of assets.
Growth(long term objectives)- To increase customer base, sales, market share,
profitability, number of stores, growth in production range, growth in employees.
,Solvency(long term objectives)-The ability of a business to pay their long term debts
on time. The extent to which the business can meet its financial objectives in the
long term. It's important to ensure the business continues operating to avoid
additional fees and penalties.
Dividend- return on your own investment, a payment thats divided across the
owners
Short term objectives- (12 months) cash flow
Long term objectives- (3 years or more) solvency, growth
Conflicting objectives-
- (Profitability and growth in the short term) For a business to grow this requires
a higher expense due to the cost of growing into different franchises, getting
more stock and developing new products which causes profitability to
decrease in the short term.
Interdependence with other key business functions
Influences on financial management
Internal sources
Internal finance comes either from the business’s owners (equity or capital) or from
the outcomes of business activities (retained profits).
Owners equity- the funds contributed by owners or partners to establish and build
the business.
Retained profits- is when all profits aren’t distributed, but are kept in the business as
a cheap and accessible source of finance for future activities. The business owner
reinvests it into the business
, External sources
External finance refers to the funds provided by sources outside the business,
including banks, other financial institutions, government, suppliers or financial
intermediaries.
Finance provided from external sources through creditors or lenders is known as
debt finance.
Types of short term borrowing: (COF)
Commercial bills:
- Bill exchange (document ordering the payment of a certain amount of money
at a fixed future date) issued by institutions other than banks and given a large
amount (usually over $100,000 for a period between 90-180 days)
- Borrower receives money immediately and must pay money back with
interest at a future time
Pros
- Used to cover short term expenses
- Cheaper form of finance
- Interest is tax deductible
- Receive funds immediately
Cons
- Interest
- Impacts profitability and liquidity of the business
Overdraft:
- Bank allows business to overdraw its account to an agreed limit
- Assists the business with short term liquidity problems
- Costs are minimal, interest rates are low and more flexibility
Positives of overdraft
- Short term needs (to boost cash flow)
- Interest paid is tax deductible
- Quick access to funds
Negatives of overdraft
- High rates of interest and account fees
- Impacts liquidity and profitability of the business
Factoring:
- Selling the money a customer hasn't paid at a reduced price to a factoring
company
