Finance Notes.pdf - Business Studies Finance 1 Role of...

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Business Studies: Finance 1. Role of Financial Management Strategic Role of Financial Management A business’s strategic plan is the long-term plan for the business as a whole. It will possibly cover 5-10 years and be constantly updated to deal with changes in the dynamic external environment in which the business operates. The strategic role of financial management within this plan is to effectively and efficiently ensure that a business continues to operate, grows and is able to achieve its future goals and objectives. One of the toughest periods for a business to survive is its first year of operations, which is the establishment phase. During this phase of the business life cycle, the short-term financial objectives for most businesses is to ensure that it is able to cover its costs by paying bills as they fall due and ultimately make a profit. In the long term, businesses have broader financial goals. Financial managers will plan the financial aspects of a business for years into the future to achieve the goals and objectives identified by owners’ managers of the business. Financial managers need strong accounting knowledge and skills to interpret and analyse a business’s financial data. Accounting is the language of financial aspects of the business. It is used to measure, process and communicate financial information. Owners and managers make decisions and plans Owners and managers collect information relating to the decsions and plans Owners and managers analyse and evaluate the results of decsions and plans
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Business Studies: Finance Objectives of Financial Management The main goal of many business owners is to become wealthy. This is how they measure their success. There are different ways to measure the financial success of a business. The first measure owners want to establish is how much profit their business is making à how much revenue remains after all expenses have been paid. Owners can choose to reinvest back into the business to help it grow or withdraw money for their own use. - Drawing : in the balance sheet, by a business owned by a sole trader or partnership -Dividends : for a company. Owners can also reward themselves with their profits e.g. luxury car, overseas trips or saving for their children’s education. 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. The financial manager’s objectives will include the business’s profitability, growth, efficiency, liquidity and solvency . Their job will be to make short and long-term funding decisions on debt and equity sources of fund, to develop financial policies such as cash control or borrowing and making the best use of the organisation’s scarce financial resources.
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