Role of Finance

Strategic Role of Finance

To ensure a business can operate in the short term, grow in the long term and achieve all of its main business goals through effective management of financial resources

Objectives of Finance

P- Profitability

L- Liquidity

E- Effiency

G- Growth

S- Solvency

Profitability

Earnings of the business once expenses have been paid.

Improve by;

maximise revenue, minimise costs

Liquidity

Ability to pay short term liabilities using current assets.

How quickly an item can be converted to cash

Efficiency

Ability to maximise the use of assets in cost effective way

Expense ratio = total expenses / total sales x 100

Maximise outputs, minimise inputs

Growth

Ability to increase size and value over long term compared to competitors.

Can be measured through revenue, market share, increased locations

Solvency

Ability to meet long term commitments and pay long term liabilities.

Measured through level of gearing.

Indicates level of L/T stability

Gearing

Proportion of debt finance compared to equity finance in a business.

gearing ratio = total liability / total equity. ideal ratio between 25-50%

Short Term

Relates to operational (d2d) and tactical (1-2yr) plans of a business

Long Term

Relates to strategic (5+ years) plans of a business, achieved through S/T goals

• profit maxing

• market share maxing

• expenses minimising

Interdependence w other key business functions

Operations 

• finance is required to purchase inputs, land etc

• operations must turn input to output for a profit

marketing

• finance establishes budgets and forecasts which marketing must follow

• marketing must generate revenue thru promotion and selling of products to customers

HR

• finance provides funds for wage/salary and HR strategies

• HR must be able to manage the workforce effectively and sell products