The Role of Financial Planning

By Brooke, Chris and Jake

Strategic Role Of Financial Management

• The role of financial management is to provide the link between what a business wants to achieve in the future and the resources that will be needed to achieve its objectives.

• The STRATEGIC role of financial management is the process of ensuring that the resources needed to achieve business goals are available when they are needed large businesses go about this process by establishing a senior management team the teams sets the direction of the business and turns the goals into achievable objectives.

• The long term, or strategic, role of financial management is to ensure that a new business continues to operate, grows and provides substantial profits to owners and shareholders. Financial manager will plan the financial aspect for years into the future.

• 2) Objective of financial management•  • One of the objectives of every business is to

become wealthy. This is how many business manage there success.

• The first objective that business owner want to measure is the profit of a business and how much or if any the business is taking on. This profit can be reinvested into the business or the owners can use it for there themselves

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Objective Definition Data from financial reports

analysis

Profitability The earnings of the business after expense have been paid

*Gross profit*NET PROFIT*earning before interest and tax(EBIT)

*formulas are calculated as a percentage of sales

Efficiency How much total revenue is spent on expenses

*expenses Formula is calculated as a percentage of sales

Return on capital The financial return to the owners as a percentage of their capital contribution

*net profit *owners equity

Compare return to owners against alternative investment

Growth The size of business compared to its competitors in the same market

*market share *number of outlets

Compare business sales to total sales in the market

Liquidity The ability of the business to pay short term liabilities using its current assets

*current assets and current liabilities

Compare current assets and current liabilities.

•Liquidity•Liquidity is the ability of a business to be

able to pay its short term debts by doing a balance sheet business managers are able to measure current asset and the current liabilities which are debts that are due to be paid within 12 months.

•This is an example of 2 different business liquidity situations

Current assets Dollar $ Current liabilities

Dollars $

Cash 1000 Bank overdraft 2000

Stock 6000 Accounts payable

3000

Accounts receivable

3000

Total current assets

10000 Total current liabilities

5000

Business A has twice as much finance available to pay is short term debts however if the suppliers need to be paid immediately the business not have enough cash on hand.

Current assets Dollars$ Current liabilities Dollar $

Cash 4000 Bank overdraft 2000

stock 3000 Accounts payable 3000

Accounts receivable 3000

Total current assets 10000 Total current liabilities 5000

Business b with liquidity is in a much better position than business A as it has more cash in hand to pay the suppliers if they need to be paid immediately.

Debtors The business or individuals that owe money to a business also known as accounts receivable

Liabilities Amount of money owed to individuals e.g. suppliers of institutions

Current assets Assets such as cash in the bank and accounts receivable that earn revenue for a business in a time shorter then usually 12 months

Current liabilities Money that is owed to external business or person that will be repaid in the shorter term usually fewer than 12 months

Account payable The money a business owes to its suppliers accounts payable is also known as creditors.

Accounts receivable Money owed to the business in the short term. This money is owed to business by customers who are yet to pay fore good or services they have already received.

Liquidity lingo list:

• The equation for liquidity• Liquidity= current assets/current liabilities• Profitability• Profitability is the most recognisable financial

objective as nearly all businesses will sell to increase profit.

• Profitability lingo list:

Gross profit The profit made on the sale of good after paying expenses of purchasing good and transporting them to the business

Net profit The final amount of revenue remaining after all expenses have been paid

Revenue-cost of goods sold=gross profit-expenses= net profit •Efficiency•Efficiency is related to profitability because

a business will be able to increase its profit when it can decrease its costs. Efficiency had to do with getting the same amount of profit out of using less amount of assets. Another measure of efficiency is the business ability to collect its accounts receivable sooner rather than later.

Growth

• A business that grows will increase its profitability in the long term.

• Growth can be achieved by:• -increasing the physical size of the business by expanding or

moving to a large office or factory• -increasing the value of assets in a business• -increasing sales and profits• -increasing market share • -opening more branches or offices in Australia or overseas • -taking over a competitor• -merging with another business in the same industry• -diversifying by buying other businesses

Return on capital

•Return on capital is the money that is returned to the owner of the business and if they are a shareholder the dividends that are returned to them for the input of money they have given the business.

THANK YOU!!

•By :•Brooke•Chris•Jake