ASSIGNMENT

Q.1 Short Questions: (18)

i. Define the term “financial management” in your own words.

Financial management involves a strategic plan on how a business should not only earn but
spend money including making decisions on how to raise capital, how to budget and on
borrowing money. It involves the setting of financial goals, analysis of financial information,
control and maintenance of financial assets of a business. It also looks into the determination of
organizational future strategies in relation to expansion, diversification, joint ventures, mergers
and acquisitions.

Financial management begins with recording of all the money that an organization earns and
spends. Financial reports are prepared that help in understanding the financial health of the
business. These reports include the profit and loss statement, balance sheet, cash flow
statement and budgets. It implies that general management principles such as planning,
organizing, directing and controlling are applied to the financial resources of the enterprise.

ii. How do business and personal finance differ?

https://corporatefinanceinstitute.com/resources/knowledge/finance/personal-finance/

Personal finance involves the planning and managing of an individual’s personal financial activities
including income generation, spending, saving, investing, and protection. It relates to how one manages
their financial assets through their saving and investing decisions. These decisions come into play
through variables such as budgeting, banking, tax, estate planning, insurance, mortgages, investments,
and retirement planning. 

On the other hand, business or corporate finance looks at the company finances as a whole as well as
what financial decisions should be made to ensure its growth. It usually deals with capital structuring
and investments. It ensures that both long- and short-term financial plans and strategies maximize the
shareholders’ value.

Below are some of the key differences between personal and business finance according to Etalia, 2022:

 Legal Regulations

The government has laws in place that are meant to protect business owners and investors at the
federal, state, and local levels. These laws regulate issues such as reporting of income, compliance with
taxes as well as paying employees and shareholders. Some of the taxes are income tax, employment tax
and exercise taxes.

For personal finance, reporting of one’s income tax is the main concern. It is calculated on salaries,
dividends, and interest rates that an individual has earned throughout the year.

 Income Streams
Organizations have several business resources and tools at their disposal which entails more
opportunities and avenues to acquire profits. Some of the common revenue streams include financial
transactions, time based income, projects, recurring revenue such as rent or brokerage fees.

On the other hand, an individual’s personal finances can’t compete with the many resources and tools
available for businesses. An individuals earning opportunities are limited to that which they can
accomplish.

 Risk Management

Access to several income streams means that a company can stay afloat even when a part of the
investment portfolio doesn’t perform well. This allows for a greater allowance to take risks with business
finances.  

With personal finances, there is a much bigger significant impact when one loses out on investments.

 Investments vs. Expenses

In organizations, the majority of expenses are seen as investments because a return is expected from
the amount that’s put into a particular investment strategy.  

Meanwhile, for personal finances, money is spent on things that give one joy without necessarily
contributing to one’s income. 

iii. What might be the main objectives of a financial management team?

According to Management study guide, 2022, financial management involves the planning,
organizing, directing and controlling of financial activities of an organization. Like any other
resources, finances are limited such that there is need to manage them efficiently. The major
goal of financial management is to manage a business’s finances such that the business is
compliant with legal regulations while being successful profitably in their field. Below are the
most important financial management objectives that businesses prioritize (Harappa, 2022):
 
 Profit maximization
The main aim of any kind of economic activity within an organization is to earn profit. The
financial management team try to earn maximum profits for the business in both the short-
term and the long-term. This is only possible with proper financial decisions.

 Wealth maximization
Wealth maximization or shareholders’ value maximization is another objective of financial
management. It involves the earning of maximum wealth for the shareholders by increasing the
market value of the shares which is directly related to the businesses performance.

 Proper estimation of total financial requirements

It is essential for the total financial requirements of the company to be estimated. It must be
known how much financing is required to enable the startup and running of the company
including the fixed capital and working capital requirements of the company. The team must
consider many factors, such as the type of technology used by the business, number of
employees to be employed, scale of operations, legal requirements, etc.

 Proper mobilization of finances

After estimating the financial requirements, the team must decide raising the required finances
through various sources such as shares, debentures, bank loans, etc.

 Proper utilization of finance

The team must utilize the finances optimally to ensure profitability by not investing the
company’s finance in unprofitable projects. They must not block the company’s finances in
inventory but must have a short credit period.

 Maintaining proper cash flow

It is essential for the organization to have a proper cash flow to ensure payments of the day-to-
day expenses such as purchasing of raw materials, paying of wages and salaries, rent, electricity
bills, etc. Once the business has a good cash flow, it can take advantage of many financial
opportunities such as getting cash discounts on purchases, large-scale purchasing, and giving
credit to customers, etc.

 Survival of company
Survival is one of the most important objective of financial management. It is cardinal for the
business to survive in the competitive business world by carefully making financial decisions
that benefit the company.

 Creating reserves
It is essential to create reserves by not distributing the full profit as dividends to the
shareholders. Reserves can be used for future growth and expansion of the business.

 Proper coordination
The success of the financial management team depends on proper coordination between the
team and other departments of the company.

 Create goodwill
The team must create goodwill for the company in order to improve the image and reputation
of the company.

 Increase efficiency
Proper distribution of finances to all the departments of the business will increase the efficiency
of the entire company.

 Financial discipline
The team exercises financial discipline. Financial discipline by investing finances only in
productive areas that will bring in high returns for the company to avoid wastage and misuse of
finances.
  Reduce cost of capital
The team tries to reduce the cost of capital by borrowing money at a low rate of interest.

 Reduce operating risks

The team reduces the operating risks and uncertainties in a business by avoiding high-risk
projects and taking proper insurance.

 Prepare capital structure

The team prepares the capital structure by deciding the ratio between owned finance and
borrowed finance. There must be a proper balance between the different sources of capital
which is necessary for liquidity, economy, flexibility and stability.

iv. How does the financial management team work?

The finance management team looks at the overall picture in order to assess organizational

health and to plan both short and long-term goals. The team uses current records and reports
to predict the growth and future trends of the business. The team makes forecasts and plans to
ensure business growth, manages and mitigates risk, looks at ways to increase capital, manages
budgets and financing options, and liaises with investors. The teams has different strategic roles
which include:

 Financial Planning and Growth

The team must analyze reports from the accounting team and use market trends to predict how
the organization will perform at various stages of the year. They provide insight into upcoming
issues or potential profits based on trends and make strategic decisions.

 Risk Management
They identify, evaluate, prioritize and mitigate risks that can affect a company as well as its
functions. They consider internal changes and external changes and use the available resources
to minimize and monitor the impact these changes might have. Risk management is necessary
to maximize opportunities by being aware of market changes and investment opportunities
that can increase the company’s profitability.

 Capital Budgeting
Capital budgeting involves considering the various options and projects available for investment
which include land acquisition, a merger, or purchasing a fixed asset such as new machinery.
The idea is to choose projects that increase profitability, maximize it and make sure it increases
the organization’s capital and growth.

 Treasury
They oversee and look after an organization’s cash and ensure that there is always enough cash
available to meet the immediate needs of the business. They work with other teams to forecast
or predict the future needs of the company and make investments to ensure that there is a
constant stream of revenue.

 Financing
This involves the availability of funds, the expenses and obligations of the organization, and
revenue streams. The team determines how much money is available and identify different
sources of income, such as investors or banks.

 Investor Relations
Investor relations are the public relations arm of the team and deal with investors, shareholders
and other stakeholders that have an interest in the company’s finances and stability. They
provide investors with reports on the company’s performance or future changes. This is
necessary to ensure ongoing support and investment.

 Corporate Strategy
This provides an overarching view of the business. It is usually undertaken by senior-level team
managers, who understand each of the functions of the business and have the knowledge and
insights to make decisions on which investments and financial planning options would maximize
growth and profitability.

v. Give three examples each of external and internal sources of finance.

Internal sources of Finance External sources of Finance

Internal sources of finance refer to External sources of finance refer to money that
money that come from within a comes from outside a business.
business.
Examples include: Examples include:
 Profit from sales  Debt financing: It includes:
 Utilization of  Bank loans
accumulated reserves   Corporate Bonds
 Funds raised from sale of  Debentures
business assets.  Equity Financing: It includes:
 Ordinary shares
 Preference shares

vi. What is the importance of financial management in a business?

A business cannot survive without finance. Each and every business objective must be
maintained with adequate amounts of financing for smooth running and also to achieve the
goals of the business. The business objectives can only be achieved with the help of effective
financial management. (Paramasivan et al)The importance of financial management is outlined
below:
 Financial Planning
Financial management aids in determining the financial requirement of the business and leads
to financial planning which is an important part of the business and helps to promote the
enterprise.

 Acquisition of Funds
Financial management is involved in the acquisition of the finances required by the business.

 Proper Use of Funds

The proper use and allocation of funds leads to improved operational efficiency of the business
and reduces the cost of capital while increasing the value of the firm.

 Financial Decision
Financial management helps in the making of sound financial decisions for the business.
Financial decisions affect the entire business because there is a direct relationship with various
departmental functions such as marketing, production personnel, etc.

 Improve Profitability
Profitability depends on the effectiveness and proper utilization of funds by the team. Financial
management helps to improve the profitability position of the business with the help of strong
financial control devices such as budgetary control, ratio analysis and cost volume profit
analysis.

 Increase the Value of the Firm

Financial management is very important in the field of increasing the wealth of the investors.
The ultimate aim of any business is to achieve maximum profit and higher profitability which
lead to maximum wealth of the investors.

 Promoting Savings
Savings are possible only when the business earns higher profits and maximizes wealth.
Effective financial management helps to promoting and mobilizing individual and corporate
savings.

2. “The financial management of any organization requires a good level of planning”.

Discuss. (7)

Financial planning is a process of estimation of capital necessary for accomplishing the

organization’s business activities. That is a process of formulation of financial policy in relation
to provision of assets, investments and organization’s funds management. Financial planning is
a process of formulation of goals, policies, procedures, programs and budget that refer to
organization’s financial activities. Financial planning means:
  providing appropriate funds,
 providing appropriate balance between the incoming and outgoing funds,
 preparation of growing and development programs which ensure long-term
sustainability of the organization,
 decrease of uncertainty regarding to market changes which the organization may face
with,
 decrease of the uncertainty which could affect the organization’s growth,
 helping to provide stability and profitability

The financial planning process is a logical, six-step procedure:

 determining the current financial situation,
 developing financial goals,
 identifying alternative courses of actions,
 evaluating alternatives,
 creating and implementing a financial action plan,
 reevaluating and revising the plan

The financial plan helps the managers to achieve the organization’s goals. The financial plan
answers the following questions:
 How much funds, in short-term or long-term, does the organization need?
 Where will that funds be provided from, i.e. which are the sources of financing (own
equity or borrowed equity (shares, bonds, securities etc.)
 How is the organization going to use the funds?

Grozdanovska,2017

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:
a. Determining capital requirements- This will depend upon factors like cost of current
and fixed assets, promotional expenses and long- range planning. Capital requirements
have to be looked with both aspects: short- term and long- term requirements.
b. Determining capital structure- The capital structure is the composition of capital, i.e.,
the relative kind and proportion of capital required in the business. This includes
decisions of debt- equity ratio- both short-term and long- term.
c. Framing financial policies with regards to cash control, lending, borrowings, etc.
d. A finance manager ensures that the scarce financial resources are maximally utilized in
the best possible manner at least cost in order to get maximum returns on investment.

The importance can be outlined as-

1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of
funds so that stability is maintained.
 3. Financial Planning ensures that the suppliers of funds are easily investing in companies
which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in
long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which
can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to
growth of the company. This helps in ensuring stability and profitability in concern.

The financial plan includes various financial information, statements, reviews and projections of
the organization’s current financial position and where it wants to be in the forthcoming period.
This information help to determine how much funds the organization needs to run the business
and where will that funds be provided from – whether borrow or invest, and how to use the
provided funds rationally. The financial plan expresses the financial sustainability of the
organization by evaluation of three perspectives - solvency, profitability and liquidity. The
solvency assesses changes in net worth, profitability controls the earnings, and liquidity
assesses cash flows and possibilities for loan repayments. The financial plan should include
three key components:
 Statement of incomes and expenses,
 Balance sheet,
 Statement of cash flows.

https://www.managementstudyguide.com/finance-functions.htm

https://www.toolshero.com/financial-management/financial-planning/

Case Study (5)

‘Tasty Break’, the sandwich business, has fixed costs of £1,000. The cost of producing a
sandwich is £1 and the price charged for each sandwich is £2.

1) Give one example of a fixed cost for ‘Tasty Break’ and one variable cost.
Fixed Cost Variable cost
Ex. Salaries Ex. Raw Materials
2) What happens to the breakeven point if:
a) The price of a sandwich is reduced to £1.50
BEP = Fixed cost
Selling price - Variable cost
= £ 1,000 = £ 1,000 = 1,000 sandwich
£2 - £1 £ 1
 But if the price of sandwich is reduced to £ 1.50
BEP = £ 1,000 = £ 1,000 = 2,000 sandwich
£ 1.50 – 1 50 p
Generalization: Therefore I conclude that if the price of the sandwich will reduce from £2 to £
1.50 the breakeven will increase from 1,000 sandwiches now it increase to 2,000 sandwiches
need to sell to cover all the company’s fixed cost of £ 1,000 to breakeven. If they sell more than
that then it will be profit for the company.
b) A cheaper bread supplier is found, reducing the production costs to 70p
BEP = Fixed cost
Selling price - Variable cost
= £ 1,000 = £ 1,000 - 1,000 Sandwich
£2–£1=£1
 but if the production cost will reduce to 70 p
BEP = £ 1,000 = £1,000 = 769.230 or 770 sandwiches
£ 2 - 70 p £ 1.30
Generalization: Therefore I conclude that if the production cost will decrease. The breakeven
also will decrease. Instead of 1,000 sandwiches , now it decrease to 770 sandwiches need to sell
to cover all the company’s fixed cost of £ 1,000 to breakeven and if the company sell more than
770 sandwiches the company will make a profit.
c) Fixed costs increase to £1,100 per month?
BEP = Fixed cost
Selling price - Variable cost
= £ 1,000 = £ 1,000 - 1,000 Sandwich
£2–£1=£1
 But if the fixed cost increase to £ 1,100 per month,
BEP = Fixed cost
Selling price - Variable cost
= £ 1,100 = £ 1,100 - 1,100 Sandwich
£2–£1=£1
Generalization: Therefore I conclude that if the fixed cost will increase the breakeven also will
increase means the company needs to sell more from 1,000 sandwiches to 1,100 sandwiches.
The company needs to sell to cover all the company’s fixed cost of £ 1,100 to breakeven. Any
sell beyond 1,100 sandwiches the company will make a good profit.

REFERENCES
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Grozdanovska,2017
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