Role Flashcards
(14 cards)
Strategic Role of financial management
Ensuring that financial resources within a business are managed effectively and efficiently in order to achieve short and long-term business goals.
- Approving all major decisions and, where appropriate, sourcing and allocating funds.
- Preparation and interpretation of all financial reports.
- Managing the accounting and budgeting processes.
Objectives of Financial management
Profitability
Refers to the earnings of the business after expenses have been paid.
HOW
To maximise profits, a business may carefully monitor its revenue and
pricing policy, expenses, inventory levels and levels of assets.
CASESTUDY
- GPR: 38% constant over time
- NP 2020: $57b up from $55b in 2019. NPR: 21% constant
- Revenue: $275b (up from $260b)
Objectives of Fincancial Managment
Efficiency
Refers to the ability of an organisation to maximise the return from its assets with minimal costs. (A/R)
HOW
A business must minimise expenses by reducing any wastage of resources. It seeks to achieve maximum profit with the lowest possible level of assets
EG getting the most for your dollar.
CASESTUDY
- Expense Ratio: 17% constant over time – Expenses are well managed (see expense minimisation strategies)
- ART 2020 - 21.2 days has improved from 32.5 days
Objectives of financial management
Growth
Refers to the ability to of the business to expand its abilities resulting in increased sales/market share and profits.
HOW
Organic growth (internally)
- Increase production/physical capacity
- Expand product range
- Increase market share (through marketing)
- Expansion overseas
- Mergers and acquisitions (externally)
CASESTUDY
- 2020 Rev growth to $275b from $260b - Europe, US and rest of Asia drove this increase 65% of all sales come from outside the US
1. Key markets: - China represents growth opportunity
- India market potential – Apple investing manufacturing capability to target this market which is growing at 7%
Sales of Services growth up from $46b to $54b. Services a key platform for Apple’s growth strategy represents almost 20% of all sales.
Objectives of financial management
Solvency
Refers to the extent to which the business can pay both short-term and long-term liabilities as they fall due.
HOW
- Measured through debt to equity Ratio. (Gearing)
- Make sure there is always cash available to pay long-term debts
- Avoid getting into too much debt (Sustainable Repayments)
CASESTUDY
Gearing ratio: 2020 increased to 3.9:1. 2019 was 2:75:1 (deterioration due to expansion, share repurchase plan).
Apple increasing its reliance of debt (cost effective)
Objectives of financial management
Liquidity
Refers to the extent to which a business can meet its financial commitments in the short term. (12 Mths)
HOW
- Measured by current ratio (current assets / current liabilities)
- Make sure that there is always cash available to pay short-term debts
- HOWEVER, too much cash sitting there can mean missed business opportunities (loss of profitability)
Current ratio:
1.37:1, has deteriorated compared to previous year 1:54:1
Apple has $91 billion in cash and short-term investments, making its debt less of a concern.
Short Term Objectives
Tactical (1 to 2 Yrs) & Operational (Day to Day)
EG - Increase profit by 9% by the end of the financial year.
Long term objectives
Strategic 5 Yr Plans - Broad goals that are supported by short term goals to assist in achivement.
- Review progess annually
EG - Earn $2M in revenue every financial year by 2030
ST/LT Objectives CASESTUDY
CFO of Apple - Luca Maestri
- Responsible for helping and setting achievement of Apple’s strategic direction
In 2021
§ Sales revenue = $366 billion
§ R&D = $21 billion
§ Net profit = $95 billion
§ Apple holds the objective to not only be profitable, but to be the most innovative competitor in the market
Short Term Objectives Conflicts with Long Term Objectives
IMPROVE EFFICIENCY
Offer discounts for early
payments
DECREASE PROFITABILITY, LIQUIDITY AND GROWTH
- Will reduce profit margins
- Will reduce the value of A/R if consistently used (therefore, decreasing value of current assets) - thus, reducing liquidity - may impact on business borrowing capacity when applying for loans (restrict the use of debt finance and therefore impact growth)
Long Term Objectives Conflicts with Short Term Objectives
IMPROVE GROWTH & PROFITABILITY
Owner wants to grow the business (Expand into a new
geographical location) and aim for higher profits in the
future (Increase sales).
DECREASE SOLVENCY & PROFITABILITY
- A business might have to sacrifice some solvency by getting a large loan
- Profitability (Interest repayments)
Finance and Operations
- Finance funds production; e.g. purchase of raw materials, inputs, new production technology etc.
- Finance sets production targets to ensure a profit can be achieved
- Finance provides budgets to ensure that quality management processes can be performed; minimising defects &/or warranty claims, thus reducing costs and thus maximising profits
- Finance monitors the performance of operations (e.g. efficiency, expenses/costs)
Finance and Human Resources
- Finance establishes budgets for wages, incentives, bonuses etc.
- Finance provides HR with funds to engage in recruitment activities
- Finance consults with HR in relation to redundancy payments if required
- Finance funds organisation training and development activities
Finance and Marketing
- Finance estimates the prices of products that Marketing presents after market research
- Finance sets budgets to fund the marketing plan; e.g. advertising and promotions budgets
- Finance establishes sales targets to ensure a profit is achieved
- Finance provides Marketing with sales data and sales reports
- Finance works with Marketing to ensure that pricing strategies and tactics are appropriate
