Role of Financial Management

Syllabus

• Strategic role of financial management

• Objectives of financial management

  • profitability, growth, efficiency, liquidity, solvency

  • short-term and long-term

• Interdependence with other key business functions

Financial management

refers to the planning and monitoring of a business’s financial resources to enable the business to achieve its financial objectives.

Strategy

 refers to long-term, broad aims affecting all key business areas

Strategic plan

refers to a plan that encompasses the strategies that a business will use to achieve its long-term goals.

strategic role of financial management

ensure that a business achieves its goals and objectives by effectively managing the business’s finances.

Objectives of financial management

profitability, growth, efficiency, liquidity, and solvency.

Profitability

refers to the ability of a business to maximise its profits.

Growth

refers to the ability of the business to increase its size in the longer term.

Efficiency

refers to 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.

Liquidity

refers to the extent to which a business can meet its financial commitments in the short term (< 12 months)

Solvency

refers to the extent to which the business can meet its financial commitments in the longer term (> 12 months)

Gearing

refers to the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business

Long-term financial objectives

determined for a set period of time, generally exceeding 5 years.

Short-term financial objectives

the Tactical (one to two years) and Operational (day-to-day) plans of a business