ROLES (finance)

• Role of financial management


  Strategic role of financial management
• Objectives of financial management

  • Profitability
  • Growth
  • Efficiency
  • Liquidity
  • Solvency
• Objectives of financial management are short-term and long-term
• Financial management is interdependent with other key business functions
• Strategic role of financial management


  • Includes a long-term view of where the business is going
  • How it will get there
  • A monitoring process to keep track of progress
• Strategic role of financial management

  Ensures that a new business continues to operate, grow and can achieve its financial objectives
• Examples of financial management


  • Finance decisions
  • Investment decisions
  • Dividend decisions
• Profitability


  • The earning performance of the business, indicates its capacity to use its resources to maximise profits
  • The ability to make a financial return from business activities
  • To ensure that the business maximises profits, a business must carefully monitor its revenue and pricing policies, costs, expenses, inventory levels and levels of assets
  • Profits satisfy owners/shareholders in the short-term but are also important for the long-term survival (sustainability) of a business
  • Long-term profit is vital to business survival; growth & investors' return on capital
  • Measured using net profit from the income statement
• Liquidity


  • The extent to which a business can meet its financial obligations in the short-term to convert current assets into cash (current liabilities)
  • Essential to maintain current assets (e.g. cash in the bank, accounts receivable) greater than current liabilities (less than 12 months e.g. short-term loan, bank overdraft)
  • Must have the sufficient cash flow to meet its financial obligations or be able to quickly convert an asset into cash in order to pay a liability e.g. selling inventory
• Efficiency


  • The ability of a business to minimise its costs and manage assets so that maximum profit is achieved with the lowest possible level of assets
  • Involves increasing the amount of output with the same number of inputs, or achieving the same amount of profit with a smaller amount of assets
  • Efficiency may be calculated using an expense ratio & also through their ability to collect accounts receivable ($ owed to them)
• Growth


  • The ability of a business to increase its size in the long term, measured through the number of stores the business operates
  • Could be achieved by increasing the value of assets, increasing market share, taking over a competitor, and opening more branches/offices in Australia or overseas
  • Businesses must monitor levels of growth & manage cash flow effectively to ensure it is sustainable
• Solvency


  • The extent to which a business can meet its financial obligations in the long-term, solvency is measured through gearing
  • Indicates if the business has long-term financial stability
  • There must not be too much cash or too little cash to pay liabilities
• Short-term financial objectives


  • Operational: Daily/Weekly Objectives
  • Tactical: 1-2 years
• Long-term financial objectives


  • Strategic: More than 5 years
• In order to achieve long-term objectives, the ability to meet short-term objectives can be affected
• Current liabilities are a company's short-term financial obligations (due in less than 12 months)
• Current assets are cash and other assets that are expected to be converted to cash in the short-term
• Gearing shows how much debt finance a business has acquired to fund its operations compared to the use of equity finance