Finance - Role of financial management

Question 1

Define financial management

Answer 1

• financial management is the planning and monitoring of a business’s financial resources to enable the business to achieve its financial objectives
• the finance department supplies the necessary funds to each business function so they can carry out their activities
• involves preparing budgets and forecasting future finances, maintaining
  sufficient cash flow

Question 2

Define the strategic role of financial management and provide examples

Answer 2

• to ensure a business achieves its goals and objectives through the strategic planning of financial resources
• setting financial objectives
• sourcing finance
• preparing budgets and forecasts
• preparing financial statements
• maintaining sufficient cash flow

Question 3

Identify the objectives of financial management (PLEGS)

Answer 3

• it is the responsibility of financial management to oversee a number of specific objectives
• profitability
• growth
• efficiency
• liquidity
• solvency

Question 4

Describe profitability as an objective of financial management

Answer 4

• financial management aims to maximise profits
• profits satisfy shareholders but are essential to the longer-term sustainability of a business
• to ensure profits are maximised, a business must carefully monitor its revenue and expenses
• profitability = revenue - expenses

Question 5

Describe growth as an objective of financial management

Answer 5

• growth is the ability of the business to increase its size into the longer term
• to ensure growth is maintained into the future, a business must set smaller objectives first
• organic growth: growth from retained profits (owner’s equity)
• acquisitive growth: growth through acquisition

Question 6

Describe efficiency as an objective of financial management

Answer 6

• the ability of a business to minimise its expenses and maximise profits using the least amount of assets
• improving efficiency by monitoring:
• expenses: costs incurred relative to sales generated
• assets: specifically how quickly accounts receivable is converted into cash

Question 7

Describe liquidity as an objective of financial management

Answer 7

• liquidity is the ability of a business to meet its financial obligations in the short term (<12 months)
• the measure of how quickly current assets can be converted into cash to pay current liabilities as they fall due
• working capital refers to the difference between current assets and current liabilities, representing the funds needed for the day to day operations of a business

Question 8

Contrast short-term and long-term goals

Answer 8

short-term:
- operational objectives: daily basis
- tactical objectives: 1-2 years
- specific aims, regularly reviewed
- doesn’t have solvency
long-term:
- strategic plan: >5 years
- broad aims, reviewed annually
- doesn’t have liquidity

Question 8

Describe solvency as an objective of financial management

Answer 8

• the ability of a business to meet its financial obligations in the longer term (>12 months)
• a measure of how much equity finance a business uses compared to the amount of debt finance to fund their activities
• gearing refers to the proportion of debt to equity in a business, indicating whether a business can repay amounts they have borrowed

Question 9

Explain the interdependence of finance with the key business functions

Answer 9

• the finance department budgets and allocates funds to each function for their activities
• the other functions help generate the revenue to be used but they also incurs costs that must be managed by finance

Question 10

Outline the interdependence of finance with operations

Answer 10

• finance provides funding for acquisition of new equipment to use in transformation processes
• operations can improve efficiency of production and identify changes to suppliers to help reduce costs

Question 11

Outline the interdependence of finance with marketing

Answer 11

• finance provides funding for marketing research and promotion campaigns
• marketing generates the revenue needed for cash flow through sale of products

Question 12

Outline the interdependence of finance with human resources

Answer 12

• finance provides employee wages, funding for hiring and training processes and redundancy packages
• HR can develop efficient staff which reduces costs and forms the labour force that will run the business and generate revenue