Financial Management

Introduction

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Role of Finance

Payment of wages and salaries

Maintenance of financial records

Production oforganisations annual accounts

Analysis of Accounting info

e.g. ratio analysis

Payment of accounts and credit control

Preparation and monitoringof internal financial

information (e.g. budgets)

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Role and importance of financial management

Vitally important to success or failure of an organisation. Efficient financial management has to:

Ensure funds available to achieve objectives e.g.

pay bills - materials, electricity, advertising

pay wages and salaries acquire resources develop new products

Ensure costs are controlled Ensure adequate cash flow Establish and control profitability levels

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Question

In your own words, explain the role and importance of financial management to a manufacturer whose objective is to improve quality.

(4 marks)

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Solution

to make sure there are sufficient funds for the organisation to buy all the resources it needs to achieve its objectives i.e. appropriate quality of raw materials, correctly trained staff, well maintained machinery (1)

to make sure there is enough money to recruit and train appropriately skilled staff to satisfy the objective of improving quality. (1)

to make sure that all the costs/expenses are under control (1)

to make sure that the organisation is performing profitably and efficiently without compromising quality (1)

to reduce costs of raw materials by ensuring the best value for money from suppliers. (1)

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Question

Outline 2 reasons why the marketing and financial departments may face conflicts of interest within an organisation

(2 marks)

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Solution

Marketing department may require cash in order to carry out promotional activities e.g. advertising, free gifts

Marketing may wish to discount price Marketing may wish to use techniques like BOGOF

All of the above are costs to the business and may result in reduced profits.

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Payment of wages & salaries

Work closely with HR department to calculate wages/salaries

Use information held by HR Dept. to calculate wages e.g. name, address, bank account details, sick days, hours worked etc. before payment takes place.

Most organisations use Bank Automated Credit System (BACS)

Advantages: No need for large sums of money to be kept on business premises

No need for large sums of money to be transported to the business premises

Cheaper for the business

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Payment of accounts

Accounts fall into CASH or CREDIT categories.

CASH accounts

Normally paid to companies or individuals that the business doesn’t deal with on a regular basis.

Normally paid using petty cash. Imprest used to meet daily cash expenses of the business.

CREDIT accounts

Business receive goods or services and pay at a later date.

Amount and timescale dependent on ‘credit history’

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Question

Distinguish between a cash account and a credit account.

(1 mark)

Describe the advantages of using the BACS system to pay wages.

(3 marks)

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Solution

A cash account is normally paid using petty cash whereas a credit account is where a business receive goods or services and pay at a later date.

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Maintenance of financial records Companies must maintain financial records - a

history of the business’s activities.

Inland Revenue require businesses to retain financial records for a period of 6 years for possible investigation.

Limited companies must comply with Companies Act of 1985 & 1989 which states that it is an offence not to maintain proper financial records.

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Managers and decision makers can make informed judgements and decisions based on financial information identified by the finance department.

Identify financialinformation fordecision makers

Cash FlowFinancial Statements and Reporting

Financial Analysis

Budgets