Financial management

Developing an understanding of the role of financial planning within business operation.

Business and resources

Financial Resources of a business are the items or inventory that a business can place a monetary value to.

Building and equipment Cash and capital

Investments Patent, and human resources

Introduction and scope

Finance refers to how a business pays for its operations. Cost is crucial businesses try to maximise profit, thus in

a competitive market minimising cost and maintaining efficiency , quality is fundamental.

Financial planning is crucial to the success of a business from sourcing funds

tracking revenues

tracking expenses Financial planning allows informed decisions to be made.

Importance and meaning Financial management is the planning, organising and

controlling the acquisition and use of financial resources for the purpose of achieving organisational goals.

Information needs to be prepared in such a way that other departments can easily understand information so decisions can be made.

Such documents include;

Balance sheets

Profit and Loss Statements

Cash Flow statements

Budgets

Financial planningFinancial planning includes the following areas

Investment planning Evaluation of new or existing projects

Pay- back

Net – present value

Finance planningDecisions about borrowing, leverage

Mix of liabilities to Owner’s equity

Risk planningVarious insurance strategies

The importance of financial management

Businesses fail for a number of reasons: Lack of capital Too many long term assets Inadequate control of inventory and credit Cash flow and debt collection (accounts receivable) Lack of control over costs and sales affecting profits All involve management and control of financial

resources.

Objectives of financial management P. L. E. R. G.

The objectives are to maximise a business’s

Profitability

Liquidity

Efficiency

Return on capital

Growth

Profitability

The ability of an organisation to maximise profits Satisfies the basic goal of all business

Satisfies the owner Sustains the business

Businesses must monitor Revenues

Pricing policy.. Costs/expenses Inventory levels

Assets levels

Liquidity

The ability of an organisation to pay its debts as they fall due.

Businesses require enough

cash flow to meet obligations Inventories must be able to

converted into cash quickly Predicting cash flows is vital

A business must avoid cash short falls or under performing funds.

Efficiency

The ability of an organisation to manage its assets to maximise profits requires:

Efficient use of organisations assets Assets must be monitored. Including

Inventories Cash

Collection of accounts receivable

Return on Capital

The amount returned to owners or shareholders as a % of their capital contribution is vital. Owners expect a return on their investment that matches or betters market returns.

Owner’s invest money CAPITAL Expect to receive a return FLOW

Returns should make the investment worthwhile Must be able to compare other possible investments

Growth

The ability of an organisation to increase its size in the long term is another key goal of business.

Maintain profit levels Develop assets to:

Increase sales Increase profit

Increase market share.

The planning cycle

Monitoring cashflows

Determining financial elements

Developingbudgets

Interpreting reportsMaintaining

Record systems

Planning financialcontrols

Minimising riskAnd losses

Addressing presentFinancial position

Developing budgets

Budgets provide information in quantitative terms (facts and figures)

Budgets can be drawn up to show1. Cost of capital and expenses

2. Cash required for planned outlays3. Cost of raw materials

4. Cost and number of labour hours For us financial budgets are important, these include

Revenue statementsBalance sheets

Cash flow statements

Revenue statement, statement of financial performance

Is a summary of the income earned and the expenses incurred over a trading period.

Revenue minus cost = profit …. The basis of the statement

revenue

costs

Revenue statement continued Revenue statements must have a “header” detailing who

it is prepared for the operating time and the purpose of the statement.

Revenue statements are organised into

Revenue

Less Cost of goods

Equals Gross profit

Less other Expenses

Equals Net profit

Expenses

Can be divided into three key groups.

COGS or Cost of goods is shown separately from expenses.Selling Administrative financial

commission stationary Interest payments

salaries Office salaries Lease payments

wages rent dividends

delivery rates

insurance

Balance sheets

Called a Statement of Financial position is used to keep an eye on the levels of DEBT and EQUITY and compare the financial position from one period to another.

The key thing to note is that ASSETS must equal the sum of all LIABILITES AND OWNERSHIP

The simplest from of balance sheet is a T style

Name of Business and date prepared

Assets Liabilities

owners equity

header

Items in the Balance sheet AssetsItems of value in a business, officially divided into TWO key

categoriesCurrent Assets cash accounts receivable (credit sales) stock or inventories pre-paid expensesNon – Current Assets machinery, and equipment buildings landIntangible Assets trade marks goodwill

liabilities

Liabilities debts owed to other people. Again divided into TWO key areas

Current liabilities accounts payable (credit owed) loans overdrafts credit cards

Non – Current liabilities leases mortgages long term loans retirement benefit funds

Owners equity

What the owner contributes. This is called capital. Owners equity is considered a liability as the business is seen as obligated to the owner.

A = L + OE is the standard equation for the balance sheet.

Cash flow statements

Cash flow statements assess whether money in flows match money out flows. In other words “liquidity”

Cash inflows Cash outflows

Cash sales Payments for stock

Credit sales Payments for expenses

Other incomes payments for other expenses

Timing of payments is vital for survival of a business