Detailed Review Notes on Finance

Resource Description

Role of Financial Management
 Strategic role of financial management
Defn: Financial management is the planning & monitoring of a business’s financial resources to enable a
business to achieve its financial goals.
– Financial resources include cash, loans & money provided by owners.
– Planning essential.
Strategies for monitoring financial resources include
– Monitoring cash flows – Paying debts
– Developing financial control techniques – Auditing of financial accounts
 Objectives of financial management
Profitability: The ability of a business to maximise profits.
– Must monitor cash flow, pricing policies, costs/expenses and inventory levels.
Growth: The ability of a business to increase its size in the long term.
– Develop and use assets to increase sales, market share, profits.
Efficiency: Ability to minimise costs and manage assets so maximum profit achieved with lowest level of assets.
– eg. Use smallest number of employees to get job done right. Relies heavily on minimising waste in all its forms.
Liquidity: Extent to which business can meet its financial commitments in the short term.
– Have enough to meet obligations, but not too much (which reduces profits).
Solvency: Extent to which business can meet its financial commitments in the long term.
– Important for shareholders/investors as helps identify level of risk.
Short term & long term:
Long term = strategic goals/plans. Eg. Increase profits by 20% over next 8 years.
Short term = operational (day to day) & tactical (1-2 years)plans that contribute towards achieving
strategic plans. Egs: purchase extra machinery to boost output, expand into new markets etc.

 Interdependence with other KBFs
– Finance is critical to every KBF. Nothing happens without money !
Influences on Financial Management
 Internal sources of finance
Retained profits: Those profits earned in past financial periods that were not allocated (spent) or distributed

to owners.

Owner’s Equity: Money contributed by owners/shareholders. Can include personal savings, share issue,

admitting a new partner etc.

 External sources of finance
Debt: Money that must be repaid to external sources (like banks).
Short term borrowing: Repaid over short periods of time. Examples include:
– Overdraft (used for short term cash shortages) – repay in 30-60 days
– Commercial bills (used by NBFIs). Useful for short term borrowing of larger amounts ($100,000+) for
periods of 90-180 days. Effectively a big IOU.
– Factoring (selling of accounts receivable at a discount (around 10-20%) to a bank or factoring
business. Not all debt recovered and often pay commission. (Last resort, really).