T2 Business HSC

Role of financial management

Make sure business has the money it needs. Manages it responsibly and uses it in ways that support business objectives such as growth profitability and long-term survival.

Financial Management

Planning and monitoring of businesses financial resources to enable business to achieve financial objectives such as maximising profitability, growth, efficiency, liquidity and solvency.

Strategy

 Long term, broad aims affecting all key business areas

• Strategic role of each function contributing to strategic direction/plan of business

Strategic plan:

 Encompasses strategies that a business will use to achieve long-term goals.

Strategic Role of Financial Management 

• Setting financial objectives ensuring business achieve them

• Sourcing finance

• Prepping budget in forecasting future finance 

• Preparing finance/ statements

• Maintaining sufficient cashflow 

• Distributing funds to other parts of the business

Financial Resources:

Resources in business that have monetary value

Long Term financial goals:

AKA strategic goals > 5 years

Short term goals 

• Tactical 1-2 years

• Operational Day to day

Objectives of financial management are to maximise businesse

Profitability, Growth, efficiency, Liquidity, Solvency

Profitability

Ability to maximise profits:

• Profit satisfy owners/shareholders on short term but not long term

• Can be achieved by monetary revenue, pricing policies, costs, expenses, inventory levels and levels of assets

Growth : Ability of business to increase size long term.

• Depends on ability to develop and use its asset structure to increase sales, profits and market share. 

• Ensure sustainability in the future

Efficiency :

Ability to minimise costs + manage assets so max profit is achieved with lowest possible level of assets.

• Relates to operations or revenue - producing activities of the business 

• Achieving efficiency - control measures in place to monitor assets and levels of inventory, cash and collection of receivables 

Liquidity

Extent to which business can meet short term financial requirements

• Businesses must have sufficient cash flow to meet its financial obligations or be able to convert current assets into cash quicjley (e.g sell inventory) 

• Cash shortfall and excess or idle cash must be avoided as both involve loss of profitability for a business

Solvency

Extent to which business can meet short term and long term < or > than 12 month

• Important to owners, shareholders,creditors of business because it is an indicator of risk to their investments

• Solvency = Ability to repay amounts that have been borrowed for investments in capital (E.g equipment and machinery or premises)

• Good indicator - Gearing = Measures % of assets of business which are funded by external sources = business become reliant on outside finance

Short term Financial Objectives 

• Tactical (1-2 years) and operational (Day-day) plans of a business

• Reviewed regularly to see if targets are being met if resources are being used to best advantage achieve objectives

• E.g management has goal to achieve 1- percent increase in profits for next 10 years, tactical plans might involve purchasing additional money, updating old equipment with new tech, expanding into new markets and providing new services

Long term financial objectives :

Strategic plans

• Determines for a set period of time, generally >5 years 

• Broad goals such as increasing profit or Market share and each will require a series of short-term goals to assist in its advancement

• Review progress annually to determine if changes need to be implemented

Conflicts between ST and NT

• LT strategies (E.g expansion, R&D) Increase future profitability but reduce short -term profits - conflict between stakeholders who want immediate returns and those on long term growth. 

Importance of balancing LT and ST

Managers must balance these competing objectives to ensure both ST stability and LT success. 

• Many resources cost money and will take a long time to pay off. Therefore minimising business ability to meet short - term obligations 

Interdependence

• Finance applies necessary funds to each aspect of business in order for them to effectively carry out activities

• Marketing, operations and hr departments rely on financial managers to allocate them adequate funds

Function and their relation to business

Operations - Funds to produce input and carry out transformation process

Marketing - Funds to undertake various forms of promotion

HR - Funds for recruitment, training and income for workers

Finance Department relies on

• Op - Product products

• Marketing - Promote products

• HR - Manage staff

How does the other business function influence Finance

• Each of functions help business generate sales and therefore provide income to finance department 

• Since Activities of each business impacts financial performance must be evaluated and controlled

• Crucial that financial managers work closely with other key business functions, in order to achieve objective