Role of Financial Management

ROLE OF FINANCIAL MANAGEMENT

- Financial management is one of the functions of management

- Financial management is concerned with

o Profits and losses of operations

o Control over funds

o Ensuring appropriate cash flow is available

o Chas management

o Raising funds / controlling internal funds

o Investment of funds

o Cost control / pricing

o Forecasting / measuring financial performance against expectations

- Accounting is a subset of financial management. Financial transactions must be recorded, classified, stored and eventually reported to the managers.

- OBJECTIVES OF FINANCIAL MANAGEMENT

o Liquidity Refers to cash reserves being held, or to the ability to turn and investment into cash with little or no delay or loss of capital

o Solvency Refers to a business ability to pay its debts when due, and remain a going concern

o Profitability Refers to how profitable the business is from the perspectives of profit on sales, assets and shareholders equity

o Efficiency Examines how well working capital is managed, that is how quickly cash is collected from debtors, inventory sold and creditors paid.

o Growth Once a business is formed and operations commence, it enters a growth phase, where there should be an increase in the number of goods or services sold

- THE PLANNING CYCLE

o Strategic or corporate plans involve how the business can accomplish its objectives, generally to create a strong competitive advantage

o Organisational planning processes involve

 The formulation of mission, goals and objectives,

 An analysis of key environmental variables that present opportunities, threats, and constraints. It is known as an environmental audit

 An organisational audit to evaluate strengths and weaknesses and identify where change needs to be met

 The formulation of strategies within deadlines to achieve specific objectives

 Monitoring and review to ensure that the mission is on target and that performance indicators are being met

o Tactical plans focus on the most efficient resource use by a business unit or department

o Operational plans are concerned with implementing the strategic plan through day to day processes, procedures, workflow and efficiency

o Financial plans represent the dollar quantification of the strategic and operating plans

o And business plan should be the result of an integrated approach that encompasses all three

o The planning cycle involves developing strategies, implementing them, monitoring the progress made, evaluating the success of them, and modifying where necessary

o One approach that can be taken is

 Determine the financial elements of the business plan

 Maintain the record systems

 Develop budgets

 Consider the cash flows

 Interpret the financial reports

 Address the present financial position

 Plan financial controls

 Minimise financial risks and losses

- MANAGEMENT OF FUNDS

- SOURCES OF FUNDS

o Internal

 Owners equity - where owners of any kind contribute to new capital

 Retained profits - the business may self-capitalise through retained profits from previous years, the funds are not invested in the owners, but back into the business

 Sale of assets

 Changing the ownership of structure

o External

 Short term borrowing

* Overdrafts - are arrangements between then business and its bank in which the business may borrow through its cheque account up to a certain amount. Overdrafts may be secured or unsecured. They are a very flexible form of short term finance because the funds are there when the business needs them and interest is only charged on the outstanding daily balance

* Bank Bills - are bill of exchange where the acceptor and/or endorser is the bank. They are usually drawn for periods of 30, 90 or 180 days and normally a face value of $100,000 or $500,000. they are usually traded in parcels of $10mil.

 Long term borrowing

* Mortgages - a form of security for a loan in which a specific item of property is pledged by the borrower or mortgagor to the lender or mortgagee

* Debentures - are a type of debt security backed by the certain assets of the issuer and of other companies in the group.

* Leasing - refers to an agreement between two parties that allows one party to use an asset, such as property owned by the other party for a specified time period

* Factoring - refers to the cash purchase of the business's sales invoices at a discount

* Venture capital - is capital that is subject to more than a normal degree of risk

o Venture capital investors structured as price equity funds, that pool money provided by institutional and other large investors who buy into unregistered companies with the aim of selling out at a profit when the company eventually lists on the stock exchange

* Grants - sometimes governments decide that a certain business is in the national interest and it pays them subsidies or a one off grant to assist them to