Strategic role of financial management

Question 1

What is the strategic role

Answer 1

The strategic role of financial management is achieving the long-term objectives of the business

in order to achieve long-term objectives a strategic financial plan is made

This involves:
. monitoring a business’s cash flows
. any financial decision eg setting strict budgets

FID - finance, investment, divedends

Question 2

Objectives of financial management

Answer 2

Profitability
Liquidity
Efficiency
Growth
Solvency

Question 3

Profitability (objective of financial management)

Answer 3

the ability of a business to maximise its profits by increasing revenue and decreasing expenses

Measured by: gross profit ratio, net profit ratio and return on equity ratio

Question 4

Strategies to improve profitability

Answer 4

. Reduce costs such as fixed and variable costs

. Implement cost centers and expense minimization strategies

. Increase revenue through implementing marketing strategies

Question 5

Liquidity (objective of financial management)

Answer 5

The ability of the business to pay short-term (current) liabilities using its current assets

measured by:

current ratio (current assets ÷ current liabilities)

balance sheet - current assets and liabilities

Question 6

strategies to improve liquidity

Answer 6

*Utilise current assets more effectively such as – cash, receivables, inventories

*Control current liabilities such as – payables, loans, overdrafts

*Sell noncurrent assets (such as buildings) using a sale and leaseback method to generate cash

*Lease equipment to reduce large capital expense

Question 7

efficiency (objective of financial management)

Answer 7

is the ability of a business to minimize its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets

Measured by: expense ratio and accounts receivable turnover ratio

Question 8

strategies to improve efficiency

Answer 8

*Reduce costs such as fixed and variable costs, payables, loans, overdrafts

*Implement stricter credit policies to improve the collection of accounts receivable

Question 9

Growth (objective of financial management)

Answer 9

is the ability of the business to increase its size in the longer term. This can be physical (size), market share or profits

Question 10

strategies to improve growth

Answer 10

*Increase revenue through
implementing marketing strategies

*Merging or acquiring new businesses

Question 11

Solvency (objective of financial management)

Answer 11

the ability of the business to pay both short-term and long-term liabilities as they fall due

Measured by: debt to equity ratio

Question 12

Strategies to improve solvency

Answer 12

*Increase total equity by issuing new shares

*Reduce debt by selling a non-current asset