ROLE Flashcards
Role of Financial management (18 cards)
What is the role of strategic financial management
Financial management is the ‘planning’ and ‘monitoring’ of a business’s financial resources (aspects) to enable the business to achieve long-term financial objectives.
What are the objectives of financial management
- Profitability
- Growth
- Efficiency
- Liquidity
- solvency
- Short term and long term
What is Profitability in finance
Profitability is the ability of a business to maximise its profits. Profits satisfy owners or shareholders in the SHORT TERM but are also important for the LONGER TERM sustainability of a firm.
How can a business maximise profitability
To ensure that profit is maximised, a business must carefully monitor its revenue and pricing policies, costs and expenses, inventory levels and levels of assets.
What is Growth in finance
Growth is the ability of the business to increase its size in the longer term. The growth of a business depends on its ability to develop and use its asset structure to increase sales, profits and market share.
How can a business maximise its growth
businesses should focus on improving cash flow, increasing profitability, controlling costs, seeking additional funding, and strategically planning for growth
What is Efficiency in Finance
Efficiency is the ability of a business to minimise its costs and manage its assets so that MAXIMUM PROFIT is achieved with the LOWEST possible level of ASSETS.
How can a business maximise its Efficiency
Achieving efficiency requires a firm to have control measures in place
to monitor assets; monitoring the levels of inventories and cash and the collection of receivables.
What is Liquidity in Finance
Liquidity is the extent to which a business can convert assets into cash in the short term (less than 12 months).
- A business must have sufficient cash flow to meet its financial obligations or be able to convert current assets into cash quickly, for example, by selling inventory.
How can a business maximise its Liquidity
Businesses should focus on efficient cash flow management, optimizing working capital, reducing overhead costs, and exploring alternative financing options
What is Solvency in Finance
Solvency is the extent to which a business can convert assets into cash in the longer term (more than 12 months).
- Solvency is particularly important to the owners, shareholders and creditors of a business because it is an indication of the risks to their investment.
How can a business maximise its Solvency
Focus on increasing profits, reducing debt, improving cash flow, optimising assets, and managing liabilities effectively
What measure can you use to measure solvency
Gearing
- Gearing measures the percentage of the assets of the business which are funded by external sources. This way, it measures the business’s reliance on outside finance.
What are short term financial objectives
Short-term financial objectives are the tactical (one to two years) and operational (day-to-day) plans of a business. These would be reviewed regularly to see if targets are being met and if resources are being used to the best advantage to achieve the objectives.
Give me an example of a short-term financial objective
To increase profitability by 5% per year
What are Long-term financial objectives
Long-term financial objectives are the strategic plans of a business. They are determined for a set period of time, generally more than five years.
Give me an example of a long term financial objective
to achieve a 20% annual increase in revenue over the next five years, enabling significant market share growth and investment in future innovation
- Long term goals require a series of short term goals to assist in its achievement
How is finance interdependent with other key business functions
The marketing, operations and human resource departments rely on financial managers to allocate them adequate FUNDS E.g - the operations department requires funds to PURCHASE inputs and carry out their transformation processes, the marketing department requires FUNDS to undertake the various forms of promotion and the human resources department requires funds in order to pay for staff.
