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 planning Financial planning includes the following areas Investment planning Evaluation of new or existing projects Pay- back Net – present value Finance planning Decisions about borrowing, leverage Mix of liabilities to Owner’s equity Risk planning Various 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 P rofitability L iquidity E fficiency R eturn on capital G rowth

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 Determining financial elements Developing budgets Monitoring cash flows Interpreting reports Maintaining Record systems Planning financial controls Minimising risk And losses Addressing present Financial position

Developing budgets Budgets provide information in quantitative terms (facts and figures) Budgets can be drawn up to show 1. Cost of capital and expenses 2. Cash required for planned outlays 3. Cost of raw materials 4. Cost and number of labour hours For us financial budgets are important, these include Revenue statements Balance 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 commissionstationaryInterest payments salariesOffice salariesLease payments wagesrentdividends deliveryrates 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 Assets Items of value in a business, officially divided into TWO key categories Current Assets cash accounts receivable (credit sales) stock or inventories pre-paid expenses Non – Current Assets machinery, and equipment buildings land Intangible 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