Business Finance - Role, Inluence and Process

What is financial management?

The process of planning, organising, directing and controlling a business's financial resources to achieve its objectives.

What are the main objectives of financial management?

Profitability, growth, efficiency, liquidity, solvency and maximising shareholder value.

What is profitability?

The ability of a business to generate profit from its operations.

Why is profitability important?

It ensures the business can survive, expand and reward owners or shareholders.

What is growth as a financial objective?

Increasing the size, sales, market share or value of the business over time.

What is efficiency?

Using financial resources effectively to minimise costs and maximise returns.

What is liquidity?

The ability of a business to meet its short-term financial obligations.

Why is liquidity important?

It ensures the business can pay bills, wages and suppliers on time.

What is solvency?

The ability of a business to meet its long-term financial obligations.

Why is solvency important?

It reduces the risk of bankruptcy and improves long-term stability.

What is gearing?

The proportion of debt used to finance a business compared with equity.

What is shareholder value?

The wealth created for shareholders through increased share prices and dividends.

How can financial management maximise shareholder value?

By increasing profitability, maintaining sustainable growth and making sound financial decisions.

What are the three main influences on financial management?

Internal sources of finance, external sources of finance and government influences.

What are internal sources of finance?

Funds generated from within the business.

Examples of internal sources of finance?

Retained profits, sale of assets and working capital management.

What are retained profits?

Profits kept within the business rather than distributed to shareholders.

Advantages of retained profits?

No interest costs, no loss of ownership and readily available.

Disadvantages of retained profits?

Limited by business profitability and may reduce shareholder dividends.

What is the sale of assets?

Selling unused or non-current assets to raise funds.

Advantages of selling assets?

Quick source of finance and improves cash flow.

Disadvantages of selling assets?

Loss of productive capacity and only a one-off source of finance.

What are external sources of finance?

Funds obtained from outside the business.

Examples of external sources of finance?

Bank overdrafts, short-term loans, long-term loans, leasing, venture capital, factoring, debentures, mortgages and share issues.

What is a bank overdraft?

A facility allowing a business to withdraw more money than is available in its account.

Advantages of bank overdrafts?

Flexible, convenient and interest is charged only on the amount used.

Disadvantages of bank overdrafts?

High interest rates and repayable on demand.

What is a short-term loan?

A loan usually repaid within one year.

Advantages of short-term loans?

Quick access to finance and suitable for temporary cash shortages.

Disadvantages of short-term loans?

Higher repayments and interest costs.

What is a long-term loan?

A loan repaid over more than one year.

Advantages of long-term loans?

Allows major investments while spreading repayments.

Disadvantages of long-term loans?

Interest costs and increased debt.

What is leasing?

Renting an asset instead of purchasing it.

Advantages of leasing?

Lower upfront costs, flexibility and easier technology upgrades.

Disadvantages of leasing?

No ownership and potentially higher long-term costs.

What is venture capital?

Funding provided by investors to businesses with high growth potential.

Advantages of venture capital?

Large amounts of finance and access to business expertise.

Disadvantages of venture capital?

Loss of ownership and control.

What is factoring?

Selling accounts receivable to a finance company for immediate cash.

Advantages of factoring?

Improves cash flow and reduces bad debt risk.

Disadvantages of factoring?

Fees reduce profits and customers may view it negatively.

What are debentures?

Long-term loans from investors secured against business assets.

Advantages of debentures?

Access to substantial long-term finance.

Disadvantages of debentures?

Interest payments and increased financial risk.

What is a mortgage?

A long-term loan secured against property.

Advantages of mortgages?

Provides significant finance for property purchases.

Disadvantages of mortgages?

Long repayment periods and interest costs.

What is a share issue?

Selling ownership shares in the business to investors.

Advantages of share issues?

No repayment required and raises large amounts of capital.

Disadvantages of share issues?

Dilutes ownership and profits must be shared through dividends.

How does the government influence financial management?

Through taxation, company law and government economic policy.

How does taxation affect financial management?

It reduces profits and influences investment and financing decisions.

How does company law influence financial management?

It regulates financial reporting, director responsibilities and shareholder rights.

How does government economic policy affect financial management?

It influences interest rates, taxation and business confidence.

What are the three financial management processes?

Planning, organising and controlling financial resources.

What is financial planning?

Setting financial objectives and determining how they will be achieved.

Why is financial planning important?

It reduces uncertainty and helps achieve business objectives.

What is budgeting?

Estimating future income and expenses over a specific period.

Why are budgets important?

They assist planning, control and performance evaluation.

What is organising financial resources?

Allocating financial resources efficiently to business activities.

What is controlling financial resources?

Monitoring financial performance and correcting deviations from plans.

What are financial controls?

Procedures used to monitor and manage financial performance.

Examples of financial controls?

Budgets, financial reports, audits and variance analysis.

What is cash flow?

The movement of cash into and out of a business.

Why is cash flow important?

A profitable business can still fail if it has poor cash flow.

What is a cash flow statement?

A financial report showing cash inflows and outflows over a period.

What are cash inflows?

Money received from customers, loans, investments or asset sales.

What are cash outflows?

Money paid for wages, suppliers, rent, tax and expenses.

What is a cash flow forecast?

A prediction of future cash inflows and outflows.

Why are cash flow forecasts important?

They identify future cash shortages and assist financial planning.

What is working capital?

Current assets minus current liabilities.

Why is working capital important?

It measures the funds available for day-to-day operations.

What are current assets?

Assets expected to be converted into cash within one year.

Examples of current assets?

Cash, inventory and accounts receivable.

What are current liabilities?

Debts payable within one year.

Examples of current liabilities?

Accounts payable, overdrafts and short-term loans.

What are non-current assets?

Assets expected to provide benefits for more than one year.

Examples of non-current assets?

Land, buildings, machinery and vehicles.

What are non-current liabilities?

Long-term debts payable after one year.

Examples of non-current liabilities?

Mortgages, debentures and long-term loans.

What is debt financing?

Raising finance by borrowing money.

Advantages of debt financing?

Ownership is retained and interest may be tax deductible.

Disadvantages of debt financing?

Interest costs and repayment obligations.

What is equity financing?

Raising finance by selling ownership in the business.

Advantages of equity financing?

No repayment obligation and lower financial risk.

Disadvantages of equity financing?

Loss of ownership and profit sharing.

What factors influence the choice between debt and equity finance?

Cost, risk, ownership, business objectives and economic conditions.

What is financial risk?

The possibility that a business cannot meet its financial obligations.

How can businesses reduce financial risk?

Maintain liquidity, manage debt, monitor cash flow and diversify sources of finance.