Financial Management Notes

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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 stra...

... middle of paper ...

...e lease agreement come to an end. Here the emphasis is on rental, rather than what is effectively deferred purchase.

• The lessee may be responsible for paying all or any of the maintenance, insurance operating costs etc

 Factoring

• Is the selling of accounts receivable or debtors ledgers to a third party for less than the book value

 Sale and leaseback

• Refers to a transaction in which the seller retains the use of an asset such as occupancy of a building, by simultaneously signing a lease, with the purchaser of the asset at the time of sale

- EFFECTIVE FINANCIAL PLANNING

o EFFECTIVE CASHFLOW MANAGEMENT

 Source of funds = use (application) of funds

 Sources include

• Injection of new capital

• Raising new loans

• Reductions in stock

 Applications include

• Pay out of loans

• Tax paid

• Purchase of fixed assets

 Management strategies for cash flow problems include

• Shortening the operations cycle

• Increasing net profit margins

• Increasing trade payable

• Borrowing money

• Maintaining a minimum cash reserve

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