PROCESSES OF FINANCIAL MANAGEMENT

Question 1

Planning and implementing

Answer 1

The five steps of the financial planning process:
FRANK BOUGHT RECORDS FOR FIN
financial needs
budgets
record system
financial risks
financial controls

Question 2

Advantages of debt financing

Answer 2

• Funds are usually readily available and can be acquired at short notice.
• Increased funds should lead to increased earnings and profits
• Interest payments are tax-deductible.
• It will not dilute the current ownership in the business.

Question 3

Disadvantages of debt financing

Answer 3

• increased risk of debt comes from financial institutions because interest, bank charges, and government charges may increase.
• regular repayments have to be paid
• Debt can be expensive, e.g. interest must be paid.

Question 4

Advantages of equity financing

Answer 4

• Cheaper than other sources of finance as there are no interest payments or additional fees
• funds do not need to be repaid
• Less risk for the business and the owner
• Low gearing (uses resources of the owner and not external sources of finance)

Question 5

Disadvantages of equity financing

Answer 5

• Ownership is diluted, i.e. the current owners will have less control
• Lower profits and lower returns for the owner
• Long, expensive process to obtain funds this way

Question 6

Monitoring and controlling

Answer 6

Financial statements are an essential tool for monitoring and controlling business practices as they indicate how effectively finance is being used.

CASH FLOW STATEMENTS
INCOME STATEMENTS
BALANCE SHEET

Question 7

Financial ratios

Answer 7

liquidity - current ratio
gearing ratio - debt to equity ratio
profitability ratios - gross profit ratio, return on equity ratio, net profit ratio
efficiency ratios - accounts receivable turnover ratio, expense ratio

Question 8

Comparative ratio analysis

Answer 8

analyses a business’s financial performance by comparing its financial ratios against a benchmark. Judgments are then made by comparing a firm’s analysis against other figures, percentages, and ratios.
- Comparisons can be made over different time periods with previous results, similar businesses or common industry standards/benchmarks.

Question 9

Limitations to financial reports

Answer 9

normalised earnings
capitalising expenses
valuing assets
timing issues
debt repayments
notes to the financial statements

Question 10

Ethical issues related to financial reports

Answer 10

Unethical activities include:
- misrepresentation of statements
- misuse of funds
- tax minimisation