Finance - Processes of Financial Management

Question 1

Identify the 5 step process of financial planning and implementing

Answer 1

• financial planning is essential and determines how the business goals will be achieved
  1. determining financial needs
  2. developing budgets
  3. maintaining record systems
  4. identifying financial risks
  5. establishing financial controls

Question 2

Outline step 1 (determining financial needs) in financial planning and implementing

Answer 2

• to determine the direction of the business, we need to know what its needs are
• can use financial information to help identify needs (e.g. statements, sales forecasts, budgets, weekly reports)
  -financial needs are determined by:
• the size of the business
• phase of business cycle
• future plans for growth and development
• capacity to source finance
• management skills
• goals and objectives

Question 3

Outline step 2 (developing budgets) in financial planning and implementing

Answer 3

• a budget (forecast) is a financial document used to estimate future revenue and expenses over a period of time
• they provide quantitative information that help a business plan, monitor and control processes
• budgets provide quantitative information about requirements to achieve a particular purpose.
• reflects how resources are planned to be used strategically.

Question 4

Outline step 3 (maintain record systems) in financial planning and implementing

Answer 4

• record systems are mechanisms employed to ensure that data is recorded and that the information is accurate, reliable and accessible
• maintaining record systems is important to minimise errors in the recording
  process
• record systems allow managers to document information they need, understand how the business is performing and make well-informed decisions

Question 5

Outline step 4 (identify financial risks) in financial planning and implementing

Answer 5

• financial risk refers to the possibility of financial loss to the business
• credit risk: borrowing and lending money
• market risk: change in market conditions
• liquidity risk: cashflow issues, difficulty meeting ST financial obligations
• operational risk: risks associated with day-to-day activities of the business

Question 6

Outline step 5 (establish financial controls) in financial planning and implementing

Answer 6

• financial controls are the policies and procedures that ensure that the plans of the business will be achieved in the most efficient way
• these are expected to be followed by management and employees
• implementing financial controls will monitor assets such as accounts receivable, inventory and cash
• separation of duties, hiring standards, routines for handling cash, store closing procedures, credit procedures

Question 7

Describe the importance of monitoring and controlling in the financial management process

Answer 7

• financial managers will prepare budgets for different areas of responsibility in the business. These budgets are then compared to the actual performance in these areas to determine corrective action if required
• cash flow statements, income statements and balance sheets are the most important financial reports produced

Question 8

Identify the importance of a cash flow statement, income statement and balance sheet

Question 9

Describe a cash flow statement

Answer 9

• shows a business’s cash inflows (receipts) and outflows (payments)
• it is a measure of liquidity, whether a business is able to meet its short term financial obligations as they fall due