finance - role

• what is the strategic role of financial management?

  the planning and monitoring of business financial resources so the business can reach its financial goals
• what is a strategic role?


  long term financial planning undertaken by senior management to achieve business objectives
• strategic plans will...

  encompass a long term view of where the business is going, how it will get there and a monitoring process to keep track of progress
• what are the objectives of financial management?

  profitability, efficiency, solvency/gearing, liquidity and growth as well as long-term and short-term objectives
• what is profitability?

  business aims to maximise profit.

  total revenue should exceed total expenses.
• what should businesses do to maintain profitability?

  monitor pricing policies, revenue, cost of goods sold, expenses, inventory levels and value of assets
• what is efficiency?

  the ability to minimize costs and manage assets to achieve maximum profits with lowest amount of assets.

  generally relates to operations or revenue producing activities in the business
• how do you maintain efficiency?

  monitoring levels of inventory, cash and collection of receivables
• what is growth?

  organic growth and acquisition and mergers

  organic growth is when the business use retained profits to expand and open new businesses

  acquisition and mergers is when the business takes over existing competitors or merge with competitors
• what is liquidity?

  the business's ability to meet financial commitments (debt) in the short term (less than 12 months)

  must have sufficient cash to meet financial obligations or by selling current assets into cash quickly.
• what is solvency?

  the business's ability to meet financial commitments (equity) in the long term (more than 12 months)
• what is gearing?

  the proportion of debt (external finance) and equity (internal finance) to finance the activities of a business
• who is solvency important to?

  credits, owners and shareholders as it is an indication of their risk
• solvency vs gearing

  when a business can pay back debt - it is solvent

  when a business has high levels of debt - it is highly geared

  therefore, a highly geared business may be insolvent.

  businesses choose to be highly geared and borrow because it enables rapid growth. this is considered a conflict of financial objectives