Role Of Financial Management Summary.docx

A) Role of financial management - Strategic role of financial management Strategic= longer term (usually more than 5 years) Strategic role of financial management is to ensure that a business achieves its goals and objective. This can only be accomplished if the business’s finances are managed effectively. Some of the strategic roles of financial management include: -

Setting financial objectives and ensuring the business is able to achieve these goals Sourcing finance Preparing budgets and forecasting future finances Preparing financial statements Maintaining sufficient cash flow Distributing funds to other parts of the business

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Objectives of financial management

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Interdependence with other key business functions

PLEGS Profitability Liquidity Efficiency Growth Solvency

= mutual dependence with marketing, operating, HR to achieve business goals

B) Influences on financial management o Internal sources of finance - Owners equity - Retained profits o External sources of finance - Debt: Short term borrowing = overdraft, commercial bills, factoring. Long-term borrowing = mortgage, debentures, unsecured notes, leasing -

Equity:

Ordinary shares = new issues, rights issues, placements, share purchase plans

Private equity MUST BE ABLE TO MATCH THE SOURCE WITH THE NEED. o

Financial institutions

Know some general information on the following and what they do/provide: -

Banks Investment banks Finance companies Superannuation funds Life insurance companies Unit trusts Australia Securities Exchange (ASX)

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Influence of Government

Through policies, legislation and government bodies. Particularly ASIC (enforce of Corporations Act 2001) and company taxation o

Global market influences

What’s happening in the rest of the world that could influence BIZ in AUS? Global economic events (outlook) Availability of funds Interest rates

C) Processes of Financial Management o Planning and implementing Financial needs? Budgets Record Systems (to keep track) What are the financial risks? Financial controls o

Monitoring and controlling

Looking at Planned vs Actual performance of the following, then taking corrective action (strategies) -

Cash flow statement Income statement

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Balance sheet o Financial ratios

A ratio shows whats on the TOP of the formula on the LEFT in terms of whats on the BOTTOM of the formula of the on the RIGHT

For example the current ratio: Current assets over current liabilities 200 000 over 100 000 = 2:1 Meaning $2 of current assets for every $1 of current liabilities - Liquidity: 1. CURRENT RATIO Current assets/current liabilities Shows short term financial stability. How many dollars of CURRENT ASSETS does the business have for every $1 of CURRENT LIABILITIES Generally acceptable ratio of 2:1 - Gearing (solvency) 1. DEBT-TO-EQUITY RATIO Total liabilities/owner’s equity Shows the extent to which the firm is relying on debt or outside sources to finance the BIZ. No optimal ratio. Higher ratio shows less solvency and more risk BUT potential for greater return.

- Profitbaility 1. GROSS PROFIT RATIO Gross profit/sales Aim for a HIGH ratio. Since gross prof is revenue- - COGS, the only ways to improve the ratio are to: i) ii)

Earn more revenue (with the same level of COGS) Reduce the COGS o Net profitability 2. NET PROFIT RATIO Net profit/sales

Aim for a HIGH ratio. Since net prof is gross prof – expenses, BIZ must look at minimizing expenses to improve the ratio. 3. RETURN ON EQUITY RATIO Net profit/total equity Aim for HIGH ratio. This is showing what the owner’s contribution is returning to the owner. Low ratio = invest money elsewhere -

Efficiency 1. Expense ratio

Total expenses/sales Aim for a LOW ratio This is showing what proportion of each sale is an expense paid by BIZ. 2. ACCOUNTS RECEIVABLE TURNOVER RATIO Sales/accounts receivable Aim for HIGH ratio (but a LOW number of days) Measures the effectiveness of a BIZ credit policy and debt collection To turn the ratio into a number of days, divide 365 by the ratio. E,g, ratio 0.1:1 means 365 divided by 0.1 = 36.5 days