The Role of Finance Management

Topics: Generally Accepted Accounting Principles, Balance sheet, Income statement Pages: 39 (7237 words) Published: March 12, 2015
ROLE OF FINANCIAL MANAGEMENT
FINANCE= ensures the business has the necessary financial resources to achieve its goals and objectives. Financial management deals with analysis, interpretation and evaluation of all financial records of the business. It also deals with the planning, monitoring and controlling of a business’ financial resources. Finance is the monetary or lifeblood of the business, whereas accounting is the reporting process.

STRATEGIC ROLE OF FINANCIAL MANAGEMENT
Strategy- long term plan of action to achieve a goal and the contribution that each unit makes to achieve them. Involves developing goals, planning and making decisions.
Organisational objective- businesses mission to give management and employees a clear direction of the business. Strategic plan- long term focus.
Tactical plan- short term.
Operational plan- day to day.
Difficult phase is to survive establishment phase of its business lifecycle. During this business aims to cover its costs and begin to make a profit. Long term or strategic role of financial management is to make sure that a new business continues to operate, grow and is able to achieve its goals. Financial managers need strong accounting knowledge and skills to interpret and analyse a business’ financial data. Accounting measures processes and communicates financial information. Major financial problem= inappropriate gearing or the business has borrowed too much and is vulnerable when interest rates rise or when further borrowings are difficult to obtain.

OBJECTIVES OF FINANCIAL MANAGEMENT
Objectives- what the business wants to achieve.
5 objectives are:
PROFITABILITY
The earnings of the business after expenses are paid.
Represented by gross profit and net profit earned in financial year. Long and short term.
Maximising profitability involves minimising sales and costs or expenses.

GROWTH
Size of the business compared to competitors.
Must increase sales, profits and market share.
Long term.
Can be achieved by merging or acquiring other businesses.

EFFICIENCY
How much of total revenue is spent on expenses.
Relates to ability to minimise costs, maximise profits and manage assets, inventory and cash. Long term.
LIQUIDITY
Ability to pay short-term liabilities/debts using current assets. Influenced by having adequate cash flow or ability to convert assets to cash quickly. Most liquid asset is cash.
Ensures the business has enough cash to fund day-to-day activities. Short term.

SOLVENCY
Ability to pay both short and long term liabilities and debt as they fall due. Long term.
SHORT-TERM AND LONG-TERM
Successful financial management= monitoring costs on a continuous basis through budgets. May concentrate on short term objectives related to maximising profits. Growth, profitability and efficiency= long term financial objectives related to different stages of the life cycle.

INTERDEPENDENCE WITH OTHER KEY BUSINESS FUNCTIONS
All KBF’s work together.
Tactical plans- short term plans based on information provided by each of the business functions. It enables the business to achieve the goals set out in its strategic plan. All departments need to see each other as a whole unit.

Financial manager must allocate adequate funds to each department (human resources, marketing, and operations) to operate. Need to also develop budgets for each department.
Must employ human resources, finance operations and marketing and achieve profit. Closely related with the different stages of the business life cycle. At each stage of life cycle a business has different objectives. At the start, businesses are focused on securing funds and planning investment. FINANCE AND OPERATIONS

Finance is needed for operations to function.
Liquidity is an important financial goal for a business. A business’ inventory management...
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