Financial management: planning and monitoring of an organization's financial resources to enable the organization to achieve its financial goals.
Liquidity: the ability of an organization to pay its debts as they fall due.
Profitability: the ability of an organization to maximize its profits.
Efficiency: the ability of an organization to manage its assets to maximize profits with the lowest possible level of assets.
Growth: involves the development and use of assets to increase sales, profit and market share.
Return on capital: the amount of profit returned to owners or shareholders as a percentage of their capital contribution.
Budgets: provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose.
Cash flow budget: records the expected receipts of cash (inflows) and expected payments of cash (outflows) over a period of time.
Records system: mechanisms employed by an organization to ensure that data is recorded and the information provided by record systems is accurate, reliable, efficient and accessible.
Strategic Role of Financial Management
Organizational planning
Goals/purposes/mission
Organizational objective
Strategic planning
Tactical planning
Operational planning
Strategic plans may cover a period of 10 years. The goals a business wants to achieve will be incorporated into the strategic plan. These goals will be translated into short term, specific objectives.
Tactical planning is flexible and adaptable, covering 1 to 2 years and allows the firm to respond quickly to changes. Operational plans provide specifics about the way in which the firm will operate in the short term.
The 3 elements to sound financial planning are:
Monitoring an organization's cash flows
Paying its debts
Continuing to make profits for its owners and shareholders
Objectives of Financial Management
Liquidity - a business must be able to predict whether they have sufficient current assets to cover current liabilities + any unexpected expenses - benchmark = 1.5 : 1
Profitability - to maximize profits, sales revenue, expenses, pricing policy and investment in assets must be monitored.
Efficiency - achieved by monitoring cash levels, inventory levels and collection of receivables.
Growth - important as it can result in increased sales, increased profit, increased market share.
Return on capital - shareholders are interested in the amount of profit to be returned on top of their capital investment
The Planning Cycle
The 8 stages of the planning cycle are:
Addressing present financial position
Determining financial elements of the business plan,
Developing budgets
Monitoring cash flows
Intercepting financial reports
Maintaining record systems
Planning financial controls
Minimizing financial risk and losses
The 2 sources of data are internal (present/past performance) and external (predictions in demand and competition).
Addressing present financial position - financial information includes balance sheets, revenue statements, cash flow statements, sales and price forecasts, budgets and ratio analysis.
Determining financial elements of the business plan - business plan sets out finance required, proposed sources of finance and a range of financial statements.
Budgets - can show cash required for planned outlays for a particular period and the estimated use and cost of raw materials/inventory. Budgets are planning and controlling - outline goals and how to achieve them, and then can be used to constantly monitor the objectives by comparing actual to planned. Factors to be considered in preparation of a budget include a review of past figures and trends and considerations from the external environment (availability of labor/materials).
Operating budgets - sales production expenses, raw materials/labor hours
Project budgets - capital expenditure information to be found research and development in each budget
Cash flows - if there is a cash surplus, short term investments can be researched to profit from the surplus - plans can be made for how long it can be invested. If a shortage is identified, short term borrowing plans may need to be made (overdraft, short term loan).
Financial reports - They show what the organization plans to achieve by the end of the period. The 3 essential reports are budgeted revenue statement, budgeted balance sheet and budgeted cash flows.
Record systems - the double system of accounting is a control tool in the sense that by recording all items twice, the entries can be seen to balance and checks to find errors can be carried out quickly.
Planning financial controls - common causes of financial problems/losses include theft, fraud, damage/loss of assets. Financial policies to control financial problems/losses include:
* clear authorization/responsibility for tasks in the organization
Budgets are used as control tools by comparing them with actual results. By determining the variance between budget and actual results, changes can be made as needed.
Minimizing risk and losses - the following need to be assessed when assessing financial risk :
* amount of organization's borrowings
* interest rates
* required level of current assets needed to finance operations
To minimize financial risk, organizations must consider the amount of profit that will be generated must be sufficient to cover the cost of debt + increasing profits to justify risk taken by owners and shareholders.
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