the concepty of financial managment
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Financial management
Developing an understanding of the role of financial planning within business operation.
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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
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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.
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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
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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
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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.
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Objectives of financial management P. L. E. R. G.
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The objectives are to maximise a business’s
Profitability
Liquidity
Efficiency
Return on capital
Growth
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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
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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.
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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
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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
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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.
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The planning cycle
Monitoring cashflows
Determining financial elements
Developingbudgets
Interpreting reportsMaintaining
Record systems
Planning financialcontrols
Minimising riskAnd losses
Addressing presentFinancial position
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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
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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
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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
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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
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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
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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
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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
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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.
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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