PROCESSES OF FINANCIAL MANAGEMENT (INCLUDING CASE STUDY)

Planning and Implementing - ANS-Cycle: Determining financial needs, developing budgets, maintaining record systems, identifying financial risks, establishing financial controls. Financial Needs - ANS-To determine the direction a business is going and how it will get there, these must be identified. Financial information needs to be collected to help to create future plans. they are determined by: - The size of the business - The current phase of the business cycle - Future plans for growth and development - Capacity to source finance - debt and equality - Management skills for assessing financial needs and planning A business plan might be used when seeking financial support because some financial institutions require a guarentee that their financial commitment will be successful i.e. the business can generate an acceptable return. A business plan sets out finance required, the proposed sources of finance and a range of financial statements. The required financial information must include; an analysis of financial performance, income statement, cashflow statement, balance sheet and financial ratio analysis reports. Budgets - ANS-provide information in quantitative terms about requirements to achieve particular purpose and are drawn up to show: - Cash required for planned outlays for a particular period - Cost of capital expenditure and associated expenses against earning capacity - Estimated use and cost of raw materials or inventory. - Number and cost of labour hours required for production Budgets reflect strategic planning decisions - how resources are used; provide financial information for specific business goals; are used in strategic, tactical and operational planning; enable constant monitoring of objectives providing a basis for administration control, direction of sales effort, production planning, control of stocks, price setting, financial requirements, control of expenses and production cost. It is used in both planning and control aspects of business. Planned performance can be measured against actual performance and corrective action taken as requirement. Factors considered in planning a budget: - Review of past figures/estimates gathered from relevant departments - Potential market or market share - Proposed expansion/discontinuation - Proposals to alter pricing/quality - Current orders/capacity - Considerations from external environment e.g. availability of materials and labor i.e. in 2018, McDonalds planned to outlay US$2.5billion in capital expenditure to renovate and open new stores, recognising financial needs and budgeting for them Operating Budgets - ANS-relate to sales production, expenses and raw materials/labor hours Project Budgets - ANS-relate to capital expenditure, research and development Financial Budgets - ANS-relate to income statements, balance sheets and cash flow statements Record Systems - ANS-the mechanisms employed by a business to ensure data is recorded and that information provided by record systems is accurate, reliable, efficent and accessible. In order to ensure accuracy a double entry system is used during accounting. By recording all items twice, entries can be checked if they balance and errors found easier. Financial Risks - ANS-the risk to a business of being unable to cover its financial obligations. If this happens it will result in bankruptcy. If the business is financed from borrowings, there is higher risk but a greater expectation of profit or dividends. To minimize this risk, businesses must consider the amount of profit that will be generated - it must be sufficiently over the cost of debt and justify the risk. Consideration is also taken from business liquidity - a business with short-term debt must have liquid assets so that loans can be payed plus interest. Financial Controls - ANS-the policies and procedures that ensure that business plans will be achieved in the most efficent way. Common policies and procedures include: - Clear authorization and responsibility for tasks in the business - Separation of duties - one person responsible for ordering another responsible for receiving inventories. - Rotation of duties - staff are skilled in more than one area allowing rotation - Control of cash - use of cash registers, cash banked daily, no money kept on premises at night. - Protection of assets - buildings kept locked, surveillance - Control of credit procedures - following up overdue accounts, credit checks. Budgets and variance reporting are examples of financial controls. Debt Financing - ANS-the short-term and long-term borrowing from external sources by a business. Can be attractive because funds are usually readily available and interest is tax deductible, reducing its cost. Risk and return must be carefully considered e.g. higher risk - impact on future profitability and financial stability. i.e. due to currency fluctuation risk in 2017, McDonalds held approx. 41.5% of its debts in other currencies (not USD) Advantages of Debt Financing - ANS-- Funds readily available and acquired at short notice. - Increased funds should lead to increased earnings/profit Continues...