Role of financial management

Liquidty

A measure of how quickly an asset may be turned into cash and therefore determines the ability of the business to pay short term liabilities as they fall due.

Quick ratio

Current assets- Inventory/ Current liabilities-OD

Current ratio (working capital ratio)

Current assets/ current liabilities

Financial management

Deals with the analysis, interpretation, and evaluation of all financial records of the business.

Short term and long term

Even though the business identifies goals and individual department objectves it must also prioritise them, as they may not all be able to be achieved at the same time.

Operating expenses ratio

Expenses/ sales x 100

Gearing

How much debt finance the business has acquired to fund its operations compared to its use of equity finance. How much risk has been taken.

Efficiency

How much of total revenue is spent on expenses.

Times interest earned ratio

Net profit/ interest expense

Return on owner's equity

Net profit/ owners equity x 100

Return on Total assets

Net profit/ total assets x 100

Strategic role

Strategic- long term plan. Effectively and efficiently ensure that a business continues to operate, grows and is able to achieve future goals and objectives. One of the toughest times to survive is the establishment phase.

Solvency

The ability of a business to pay both short term and long term liabilities as they fall due. A measure of whether a business is financially stable.

Profitability

The earnings of the business after expenses have been paid.

Net profit

The final amount of revenue after all expenses have been paid. NP= GP - expenses

Objectives of financial management

The main goal of many business owners is to become wealthy. There are different ways to measure financial success. The first is how much profit their business is making- how much revenue remains after all expenses have been paid- represents their return on capital they have invested. The owners can reinvest money back into the business (retained profit) or withdraw money for their own use. (drawings for sole trader or partnership and dividends for a company). The role of financial management is to develop a tactical plan identifying short term objectives and strategies that enable finance to support the whole business in achieving its strategic goals. Objectives include profitability, growth, efficiency, liquidity and solvency. Financial managers will make short and long term funding decisions on debt and equity sources, to develop financial policies such as cash control or borrowing and making the best use of financial resources.Financial reports give a detailed picture of profitability and financial stability. Analysis of the data will show change from one year to the next, creating trends.

Gross profit

The revenue remaining after paying costs of good sold, that is, the expenses of purchasing the goods wholesale and transporting them to the business ready for sale (freight or cartage inwards). GP= sales- COGS

Growth

The size of the business compared to its competitors in the same market. A business that grows will increase its size and therefore its profitability in the long term. Compare business sales to total sales in the market.

Debt to equity ratio (gearing ratio)

Total debts/ owner's equity x 100

Accounts receivable ratio

1. Sales/ Acc reciev 2. 360/answer