Chapter 9: role of financial management Flashcards
(26 cards)
define financial management
refers to the planning, organising and controlling of a bus’s financial resources to enable the bus to achieve its financial obj and broader goals
what are financial reosurces
resources of a bus that have monetary value
what are the adv of successful amangement of financial resources
allows buses to achieve profits, a return in investment, long term stability and growth
what is the strategic role of financial management
- provide the financial resources req’d to implement the strategic plan of the bus
- outlines the goals, objectuves and future direction of a bus and the strats to achieve those goals
what the key responsibilities of finance managers in performing the strategic role of the finance function
- set financial objectives and ensure that these are met
- prepare budgets and forecast future finances
- source finance
- dsitribute funds to other key bus functions
- maintain sufficient cash flows
- prepare financial statements
what ongoing financial management activities are needed to support the strategic role
- monitor cash flow
- setting policies and procedures regarding cash and credit controls
- payment of short term and long term debts
- determining the appropriate mix of debt and equity finance raising
- budgeting, including monitoring actual and planned performance
- record keeping and analysis using financial statement and ratios
- auditing of financial accs and records
- developing and implementing financial controls to minimise theft, fraud, loss of assets or errors in record systems
- taxation management
- efficient use of financial resources
mismanagement of financial resources can lead to problems such as:
- insufficient cash to pay suppliers
- inadequate capital for expansion
- having too much stock of finished goods or raw materials
- having too many assets that are not productive (ie. not generating revenue)
- delays in receiving funds from credit sales
- inability to pay long-term debts
- business failure
what are the five main objectives of financial management
liquidity, profitability, efficiency, growth and solvency
what is profitability
profitability is the ability to make a financial return on from buse activities - ie to maximise profits by ensuring that revenues exceed financial outlays by the largest possible amount (in short increasing sales and decreasing costs)
what is the role of profits in the short term and long term
profits satisfy owners and shareholders in the short term, and are curcial for attracting and maintaining investment for the sustainability fo the bus in the long term
what is growth
Growth is the increase in size and value of a business over time
- involves the expansion of product range, sales, profits and market share
how can grwoth be achieved internally and externally
internally:
- increased demand
- improved productivity
- new products or outlets
externallly:
- by purchasing other buses or thru mergers and acquisitions
too much grwoth too fast can be unsustainable causing cahs flow problems
what is efficiency
is the ability of a business to maximise profits whilst minimising assets
- involves increasing output with same inputs or maintaining current level of outputs using fewer inputs
what is liquidity
liqudity is te ability of a bus to pay its short term debts
- must have sufficient cash flow to meet its ifnancial obligations
what is the formula for working capital
current assets - current liabilities
why is having too much or too little working capital an issue (why do buses need to determine optimal amt of working capital)
- too much working capital lead to inefficiency ie unutilised money that dont generate retruns in the way other uses for it might eg new equip, buying shares in other buses, lending funds to borrowers
- having too little causes liquidity problems such as an inability to pay employees, suppliers and other costs –> possible bus failure. also unable to take adv of makret opps
what is solvency
Solvency is the ability fo a bus to meet its financial commitments in the long term (a period grater than 12 months)
- owners, shareholders and creditors are particularly concerned with solvency as it indicates the security of their investment
what happens to colvency if a bus borrows too much
if bus borrows too much for capital investments or to meet short term expenses and repayments exceed the ability to generate cash for sales, the bus will become insolvent and cease trading
- in short if a bus borrows too much and doesnt make enough revenue to pay back then they will become insolvent
what is a good way to measure insolvency
gearing which measures the proportion of debt (external finance) to equity (internal finance) used to finance the activities of a bus
what is highly geared vs low gearing
- a bus that is highly geared has high reliance on debt finance and is at higher risk of insolvency
- a bus that is lowly geared has high reliance on equity finance from shareholders and is at lower risk of insolvency
determine the difference b/w tactical plans and operational objectives
tactical plans involve expansion and capital investment whereas operational objectives will mainly be concerned with cash flow and keeping working capital positive so bus remains solvent (ie one is abt finance long term whereas the other is abt keeping the bus afloat in short term)
what is the potential conflict b/w long term obj of growth and expansion and the short term obj of profitability, managing cash flow and repaying debt
growth is a gradual process involving regualr repayments of loans plus interest. these investments can take a long time to generate the increases in revenue req’d to achieve higher profits and repay loans (threatening liquidity in the short term)
which stakeholder are usually adovating for logn term growth
- owners and sharehodlers are the main beenficiaries of logn term growth (more willing to take risks than managers)
- managers prioritise short term obj which can discourage important long term investment, however too much focus on long term vision with lack of attention for short tern can lead to insolvency before benefits of investments are realised
how does finance rely on ops
- reducing production costs or increasing output with existing levels of inputs to increase efficiency and profitability through lower costs or higher revenue (or both)
- increasing scale of ops thru expansion can help bus grow and receive greater return on their investment
- effective inventory management can lead to improvements in efficiency (reducing cost thru less waste), profitability (reducing COGS) and liquidity (freeing up cash for short term liabilities)
- long term: efficient ops can reduce bus’s dependence on debt finance
