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Linda Michelo Zyongwe, 6483, Assignment Five

Assignment Cover Sheet

Student Name: Linda Michelo Zyongwe

Student Number: 6483
Course: Diploma in Business Administration – Level 4
Assignment No: Five

Marking Criteria:

We expect the learners to write minimum one well expressed point in three lines against each
allocated mark. This means one needs to write 15 lines with 5 well expressed points to get high
grades for a 5 marks question.

For high grades use examples and illustrations where appropriate.

Please insert your completed assignment ( in word format) here:

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.
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Linda Michelo Zyongwe, 6483, Assignment Five

ii. How do business and personal finance differ?

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
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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
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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.
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 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
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Linda Michelo Zyongwe, 6483, Assignment Five

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.
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Linda Michelo Zyongwe, 6483, Assignment Five

 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
money that come from within a that comes from outside a business.
business.
Examples include: Examples include:
 Profit from sales  Debt financing: It includes:
 Utilization of  Bank loans
accumulated reserves 
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 Funds raised from sale of  Corporate Bonds

business assets.  Debentures
 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
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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 involves the process of estimating the capital that is necessary to
accomplish the organization’s business activities. It involves formulation of financial
policies in relation to provision of assets, investments and organization’s funds
management. It is the creation of goals, policies, procedures, programs and budget
that refer to organization’s financial activities. Financial planning is involved with:
 Provision of adequate funds
 Provision of appropriate balance between the incoming and outgoing funds,
 Implementation of growing and development programs to ensure the long-
term sustainability of the organization,
 Decreased uncertainty regarding market changes which the organization may
face
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 helping to provide stability and profitability

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

 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 planning helps the managers to achieve the organization’s goals.
Financial planning is important because it answers the following important questions:
 How much funds does the organization need in both the short and long term?
 Where will funds be provided from or which are the sources of financing?
They can be own equity or borrowed equity such as shares, bonds, securities
etc.
 How will the organization use the funds?

According to Grozdanovska, 2017, Planning is essential to financial management

because:
 It enables adequate funds to be ensured.
 Financial Planning helps in ensuring the maintenance of a stable balance
between outflow and inflow of funds.
 Financial Planning helps in making growth and expansion programmes and
decisions which in turn help in the long-run survival of the business.
 It reduces uncertainties with regards to changing market trends which can be
resolved easily through adequate funds.

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.
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Linda Michelo Zyongwe, 6483, Assignment Five

1) Give one example of a fixed cost for ‘Tasty Break’ and one variable cost.

Fixed Cost - Salaries

Variable cost - 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

Therefore, if the price of the sandwich will reduce from £2 to £ 1.50, the breakeven
will increase from 1,000 sandwiches to 2,000 sandwiches.

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

Therefore, if the production cost will decrease, the breakeven point will also
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decrease. Instead of 1,000 sandwiches, now it decreases to 770 sandwiches.

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

Therefore if the fixed cost increases, the breakeven will also increase meaning the
company needs to increase from 1,000 sandwiches to 1,100 sandwiches.
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REFERENCES

1. Grozdanovska V, Bojkovska K and Jankulovski N, 2017, Financial

management and financial planning in the organizations,
https://core.ac.uk/download/pdf/234627714.pdf
2. https://www.xero.com/ph/glossary/financial-management/#:~:text=Financial
%20management%20is%20strategically%20planning,financial%20goals
%20and%20analysing%20data.
3. https://www.managementstudyguide.com/financial-management.htm
4. https://corporatefinanceinstitute.com/resources/knowledge/finance/personal-
finance/
5. https://etalia.net/the-similarities-and-difference-between-business-and-
personal-finance/
6. https://harappa.education/harappa-diaries/financial-management-objectives/
7. https://relivingmbadays.wordpress.com/2013/04/28/objective-of-financial-
management/
8. https://www.cfajournal.org/objective-financial-management/
9. https://www.wikijob.co.uk/financial-terms/corporate/finance
10. https://paro.ai/blog/modern-finance-department-functions-roles-approaches-
evolving/
11. https://keydifferences.com/difference-between-internal-and-external-sources-
of-finance.html#:~:text=Internal%20sources%20of%20finance%20include
%20Sale%20of%20Stock%2C%20Sale%20of,Trade%20Credit%2C
%20Factoring%2C%20etc.
12. https://www.termscompared.com/internal-vs-external-sources-of-finance/
13. https://www.educba.com/internal-sources-of-finance/
14. https://www.pfh-university.com/blog/financial-management-what-is-it-and-
why-is-it-important.html
15. https://www.lsbf.org.uk/blog/news/importance-of-financial-management/
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117410#:~:text=Helps%20in%20improving%20the%20profitability,them%20in
%20personal%20financial%20planning.
16. https://www.mygreatlearning.com/blog/financial-management-introduction-
guide/
17. https://www.toolshero.com/financial-management/financial-planning/

Student Statement:

By submitting this assignment, I confirm that this is my own work.

Student Signature: Linda Michelo Zyongwe Date: 22/06/2022

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Linda Michelo Zyongwe, 6483, Assignment Five

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