The objectives of financial management are:
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- Profitability
- Growth
- Efficiency
- Liquidity
- Solvency
Profitability
- Profitability is :: the ability of a business to maximise its profits.
- profit is maximised through increasing profit margins
Growth
- Growth refers to :: the ability of the business to increase its size in the longer term
- it ensures that the business is sustainable into the future
- Growth is achieved through:
- business expansion
- increase in asset values
- increasing market shares
- increasing profit
- expanding the businesses’s product range
Efficiency
- Efficiency refers to :: how a business can increase profit through using the least amount of inputs (expenses) and maximising outputs.
- Efficiency is achieved through
- Using less inputs and charging same price to maximise profit margin
- Collection of accounts receivable
- selling goods to others which they haven’t yet paid for
- appears on the balance sheet as assets
Liquidity
- Liquidity is :: a measure of how quickly an asset may be converted into cash
- therefore determines the ability of the business to pay short-term debts
- Most liquid assets are Current Assets (cash, accounts, receivable, inventory)
- used for the businesses’s current liabilities:
- overdrafts
- bank loans
- accounts payable
- often at a ratio of 2:1 (current:non-current)
Solvency
- Solvency refers to :: the extent to which the business can meet its financial commitments in the longer term.
- it measures a businesses financial stability
- Strategies for measuring solvency:
- Gearing shows :: the debt to equity ratio a business uses to run its operations.
Short-term & Long-term financial objectives:
Short-term
- Short term goals are the :: tactical (one to two years) and operational (day-to-day) plans of a business.
- they are the actions that are used to achieve the strategic goals in the end
Long-term
- Long term goals are the :: strategic plans of a business, determined for a set period of time (generally more than five years)
- often refers to the triple bottom line, which includes:
- Financial (increasing profit & market share)
- Social impacts (creating jobs and supporting local activities)
- Reducing activities that are negative to the environment (CSR)