1. Handout 10: Financial management
PowerPoint presentation
Unit 320 (B&A 59): Principles of business
Handout 10: Financial management

2. Every organisation needs finance to ensure: profitability survival.
Private organisations exist to make a profit.
Public organisations must have sufficient finance to fulfil their public service obligations.
Voluntary organisations need funds for their cause and to finance their operation.
Whether the organisation is a small partnership or a large multi-national, without adequate finance the business will die.

3. The movement of money in and out of an organisation.
Cash flow
The movement of money in and out of an organisation.
In through sales of goods/services.
Out through payment of costs:
raw materials
staff/labour
transport
rent
power and lighting.
The difference between the amount of money coming into and going out of a business is the net cash flow.
More money coming in than going out = positive cash flow
Less money coming in than going out = negative cash flow.
A negative cash flow may mean that the business will struggle to pay its bills meaning it may need to borrow funds.
A business may still be making a profit on paper, but have a negative cash flow if its debtors are slow at paying them.

4. Liquid assets are those that are easily converted to available cash.
Liquidity
Liquid assets are those that are easily converted to available cash.
Stocks and shares in other organisations = very liquid assets.
Premises owned by the organisation = least liquid asset.
An organisation is liquid when it has assets that can easily be converted to provide cash for use immediately or in the near future.
Liquidity and positive cash flow are most important in times of recession when borrowing money may be more difficult or interest rates more expensive.

5. Capital + Liabilities = Assets
Balance sheet
Lists assets and liabilities of an organisation at a given date
Lists assets in order of realisability
Lists liabilities in order of priority
Provides a snapshot of the organisation’s liquidity
Capital + Liabilities = Assets

6. Aims of financial management
To ensure:
cash flows in and out are controlled
enough cash available to pay costs
enough cash available for investment
cash not tied up unprofitably, eg in stock
procedures to realise the cash from revenue, eg that debtors’ invoices are paid on time.
Surpluses of cash need to be put to work to make more money through investment.

7. Ways to improve cash flow
Realising or making unused assets work, eg renting out unused premises
Rigorous procedures for obtaining payments
Offering discounts for fast payment of invoices
Using hire purchase/leasing for capital assets to spread payments
Negotiating trade terms from suppliers
Accurately forecasting cash flow to anticipate and plan for problems

8. Profit and loss accounts
A statement of revenue and costs for an organisation over a specific period
Total income – Total operating costs = Profit/loss
A positive result is the net profit
A negative result indicates a loss
Profit and loss accounts are either for internal use or for publication.
Private and public limited companies are required to make their accounts available to their shareholders and to submit a copy to the Registrar of Companies.

9. Functions of financial management in an organisation
To ensure finance is available to meet strategic aims
To use finance cost-efficiently through investment
To use analysis of internal and external financial information to provide management with accurate forecasts
To ensure compliance with legal requirements for financial reporting
To control and monitor use of funds throughout the organisation
To inform future financial strategy for the organisation

10. Consquences of poor financial management
Decrease in profits
Inability to expand/raise capital
Difficulty in obtaining credit from suppliers
Inability to pay wage bill
Loss of market share
Liquidation/administration
The consequences will also impact externally on eg the organisation’s suppliers/creditors and in turn on theirs.