Financial Management

Financial management entails planning for the future of a person or

a business enterprise to ensure a positive cash flow. It includes the
administration and maintenance of financial assets. Besides, financial
management covers the process of identifying and managing risks.
The primary concern of financial management is the assessment rather than the
techniques of financial quantification. A financial manager looks at the available
data to judge the performance of enterprises. Managerial finance is an
interdisciplinary approach that borrows from both managerial accounting and
corporate finance.
Some experts refer to financial management as the science of money
management. The primary usage of this term is in the world of financing business
activities. However, financial management is important at all levels of human
existence because every entity needs to look after its finances.

Financial Management: Levels

Broadly speaking, the process of financial management takes place at two levels.
At the individual level, financial management involves tailoring expenses
according to the financial resources of an individual. Individuals with surplus cash
or access to funding invest their money to make up for the impact of taxation and
inflation. Else, they spend it on discretionary items. They need to be able to take
the financial decisions that are intended to benefit them in the long run and help
them achieve their financial goals.
From an organizational point of view, the process of financial management is
associated with financial planning and financial control. Financial planning seeks
to quantify various financial resources available and plan the size and timing of
expenditures. Financial control refers to monitoring cashflow. Inflow is the
amount of money coming into a particular company, while outflow is a record of
the expenditure being made by the company. Managing this movement of funds
in relation to the budget is essential for a business.
At the corporate level, the main aim of the process ofmanaging finances is to
achieve the various goals a company sets at a given point of time. Businesses
also seek to generate substantial amounts of profits, following a particular set of
financial processes.
Financial managers aim to boost the levels of resources at their disposal.
Besides, they control the functioning on money put in by external investors.
Providing investors with sufficient amount of returns on their investments is one
of the goals that every company tries to achieve. Efficient financial management
ensures that this becomes possible.
Strong financial management in the business arena requires managers to be
able to:

• Interpret financial reports including income statements, Profits and Loss or

P&L, cash flow statements and balance sheet statements

• Improve the allocation of working capital within business operations

• Review and fine tune financial budgeting, and revenue and cost
forecasting

• Look at the funding options for business expansion, including both long
and short term financing
• Review the financial health of the company or business unit using ratio
analyses, such as the gearing ratio,profit per employee and weighted cost of
capital
• Understand the various techniques using in project and asset valuations
• Apply critical financial decision making techniques to assess whether to
proceed with an investmtn
• Understand valuations frameworks for businesses, portfolios and
intangible assets

Introduction
Financial Management can be defined as:
The management of the finances of a business / organisation in order to achieve financial
objectives

Taking a commercial business as the most common organisational structure, the key objectives
of financial management would be to:

• Create wealth for the business

• Generate cash, and

• Provide an adequate return on investment bearing in mind the risks that the business is
taking and the resources invested

There are three key elements to the process of financial management:

(1) Financial Planning

Management need to ensure that enough funding is available at the right time to meet the
needs of the business. In the short term, funding may be needed to invest in equipment and
stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be required for significant additions to the
productive capacity of the business or to make acquisitions.

(2) Financial Control

Financial control is a critically important activity to help the business ensure that the business
is meeting its objectives. Financial control addresses questions such as:

• Are assets being used efficiently?

• Are the businesses assets secure?

• Do management act in the best interest of shareholders and in accordance with business
rules?

(3) Financial Decision-making

The key aspects of financial decision-making relate to investment, financing and dividends:

• Investments must be financed in some way – however there are always financing alternatives
that can be considered. For example it is possible to raise finance from selling new shares,
borrowing from banks or taking credit from suppliers

• A key financing decision is whether profits earned by the business should be retained rather
than distributed to shareholders via dividends. If dividends are too high, the business may be
starved of funding to reinvest in growing revenues and profits further.
University of London External System 7
Chapter 1: Introduction to financial
management
Aims of the chapter
This chapter is clearly one of the most important in the subject
guide because it deals with the fundamentals of financial
management. Without a clear understanding of the fundamentals
the remainder of this subject will not be easy to grasp. As with any
subject area, a knowledge of the background, the environment to
which the subject relates, is important as it helps to put everything
learnt later into appropriate perspective.
The chapter starts by looking at the key tasks of financial
management. Since knowledge of the financial environment is vital
to managers this comes next before the review of the differing
organisational forms of business that are in use.
An outline of corporate objectives follows because these form the
basis of much of the theory that is covered in this subject. The roles
of financial managers come next, to be followed by a discussion of
some of their conflicts of interest and how they might be resolved.
One area of major interest is the corporate governance debate on
how the relationship between owners and controllers should be
systemised to maximise the corporate gain.
Brief descriptions of how risk is treated in financial management
theory, and how accounting is linked in with financial
management, are included and the chapter is concluded with a
note of the direction and importance of taxation in today’s financial
decisions.
The unit 25 Principles of accounting, if studied carefully and
fully, should have meant you already have all this background
knowledge. If that is true, then perhaps only a quick review of this
subject matter is necessary, but if the practise questions and
problem(s) here and in the essential text cause you any problems,
then a more detailed and careful review of your pre-requisite unit
may be needed.
Learning objectives
By the end of this chapter, and having completed the essential
reading and activities, you should be able to:
_ describe the general financial environment in which
corporations operate
_ explain the importance and roles of financial markets
59 Financial management
8 University of London External System
_ list/outline the roles financial managers can have within an
organisation
_ outline such things as taxation, accounting information and
form of business and their implications for financial
management
_ give examples of the various objectives a company may have
and why the main objective is deemed to be shareholder
wealth maximisation
_ explain and give examples of how the influence of risk will
permeate all aspects of financial management, the theories
presented, the appraisal and selection, the changes suggested,
and the control methods used.
Essential reading
Brealey, R.A., S.C. Myers and A.J. Marcus Fundamentals of Corporate
Finance. (McGraw-Hill Inc, 2007) Chapters 1, 2 and 3.
Further reading
Brealey, R.A., S.C. Myers and F. Allen Principles of Corporate
Finance. (McGraw-Hill, 2008) Chapter 1.
Atrill, P. Financial Management for Decision makers. (FT Prentice
Hall Europe, 2005) Chapters 1 and 2.
Key tasks of financial management
There are five key tasks undertaken in financial management
_ financial planning
_ investment project appraisal
_ financial decisions
_ capital market operations
_ financial control.
Financial planning provides the means, through plans and
projections, to evaluate the proposed courses of action. Similarly
financial control deals with the ways and means by which the plans
are achieved. The next two tasks, investment project appraisal and
financing decisions are seen by some, including Brealey and Myers,
as the two most important tasks.
Investment project appraisal is the assessment and evaluation of
the relative strengths of a company’s investment propositions. The
financing decisions involve the identification and choice of the
sources of funds which will provide the cash to be invested into the
selected projects. Part of the finance function is dealing with the
capital market since a large part of the finance is obtained through
the capital market, not least those funds provided by the equity
owners, the ordinary shareholders. This function does not just
deal with the raising of funds but also with the ongoing relationship
between the company and the market place; information
Chapter 1: Introduction to financial management
University of London External System 9
disseminated to the capital markets affects the market’s perception
of the company and the price of the company’s shares, and thus
wealth of the shareholder.
Financial environment
The economic and social background of a country is a major
influence on a firm, on its structure and on its objectives and
operations. Firms in socialist or communist countries have
different structures and objectives from those that operate in
capitalist economies. Countries that are still developing may not
have a public market place (i.e. a stock market) in which the shares
in a company can be traded. Different phases of the trade cycle
have different implications for financial operations. In depressed
times, interest rates payable on loans will be higher, trading
conditions much more risky and so returns to shareholders may be
lower or non-existent.
In the capitalist economies of developed countries where there are
stockmarkets, the owners of the shares in trading companies will
expect returns on those shares. The quality and amount of that
return, the dividend, will be one of the elements influencing the
price at which the share is quoted in the market. Potential owners
of shares as well as existing owners of shares are interested in the
quoted price of a company’s share and in the return obtainable
from that investment. How and why those returns and share prices
can be influenced will be covered later. The extent of a country’s
capital markets, of which the stockmarket is but a part, vary
enormously from the very large, very sophisticated, very structured
markets such as London and New York to some of the very small
nascent markets in some developing countries in Africa and the
Middle East.
Each country has its own sets of laws and regulations which
provide the parameters for the structure of the entity and how it
can operate on a daily basis.
Organisational forms of business
Businesses established for profit-making purposes generally are
organised into one of two forms: incorporated and un-incorporated.
The incorporated firm are the companies or corporations, while the
un-incorporated are either proprietorships or partnerships.
The corporation or company is a legal entity of unlimited life,
independent of its owners. The owners of a company, its
shareholders, have limited liability for the debts and obligation of
the company. The liability being limited to the par or nominal value
of the shares or equity held. With ownership usually comes some
form of control through voting rights, but this does not extend to
managerial control of day to day operations. For that, management,
by way of directors, have to be appointed to act as the shareholders’
agents. Therefore, in theory, ownership and management are likely
to be separate, unless of course managers are also major
shareholders.
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10 University of London External System
The unincorporated form of business make up the majority of the
numbers of businesses, though not the majority in terms of value or
employment. These businesses are generally sole proprietorships or
partnerships. The liability of the owners of these entities is
unlimited. They are managed by the owners and do not have a
separate legal entity even though they may have a separate trading
name. Ownership and management risks are intertwined which
makes raising very large sums of capital almost impossible. If the
owner/partners want the entity to continue to grow then usually a
change in form for the entity will be necessary. In this subject guide
we will be viewing financial management from the perspective of a
corporate entity, but much of what is covered is also relevant to the
unincorporated business.
Corporate objectives
Generally we assume that a company’s objective is to increase the
value of the shareholders’ investment in the firm. We also assume
that all managers act to further that objective. Shareholder wealth
maximisation is the normative objective of a company that
underlies financial management theory.
In practice, a company has many stakeholders, employees,
customers, government, creditors, lenders as well as shareholders.
As groups they have their objectives for the company and as
individuals they have their own objectives for their stake in the
company. Some of these individual objectives may be at slight
variance with the others, for example, customers want the company
to provide the product with the highest quality and lowest price,
but this may not result in high profits and share price
maximisation. Corporate objectives are determined by a relatively
small group of senior management, probably the directors. These
can be influenced by a number of things with an outcome which
may not be shareholder wealth maximisation, and which can be
allowed to vary with circumstances and over time. It is often
argued in the UK financial press that though companies may be
trying to increase shareholder wealth it is not with a long-term
perspective but is only short-term oriented.
Activity 1.1
Consider the stakeholders of a business as described earlier.
_ Try to list what you believe are the major objectives of each group. There
may be two, three or more for each group.
_ Then try to rank each group’s objectives in order of importance.
_ Now draft your reasons for your rankings.
_ Next assume you are the Board of Directors and you are required to publish
the company’s objective(s).
_ Which one(s) would you list and why? Do they all directly or indirectly lead
to shareholder wealth maximisation?
Chapter 1: Introduction to financial management
University of London External System 11
Your lists could be based upon the company(s) you know or work for. Do not be
surprised by the differences and variations, and do not forget the power of the
financial market place in steering you towards your final selection.
� See VLE for solution
Role of managers
A company is a complex organisation made up of many employees
each with their own objectives. In theory, the manager is expected
to act in furtherance of the goals of the owners. The financial
manager is expected to act as the intermediary who will undertake
the tasks of financial management. That is, the manager, using the
evaluation, planning and control techniques and systems, will
attempt to maximise the return from the optimal selection of
investments so as to satisfy the providers of finance from whom
(s)he has obtained the cheapest and best combination of funds via
the capital markets. However, managers may not be owners.
Conflicts of interest and their resolution
One of the major disadvantages of the corporate form is the
separation of management and ownership. This separation can
create costs which have been called the costs of agency since
management is deemed to be the agent of the owners (the
principals). Agency theory attempts to explain this situation and
how conflicts between principal and agent can arise, as well as
possible ways in which the costs of any such conflict can be
minimised. It is argued that agents will tend to pursue their own
goals and the greater the deviation of those goals from the
corporate goals, the greater the agency costs. Therefore incentives
should be provided to try to ensure convergence of goals between
principal and agent (e.g. share option schemes). Systems should be
used to monitor and ensure control of agents, for example use of
annual reports, the setting up of an appropriate governance
structure which restricts, minimises and hopefully enables the
removal of management, and in particular directors, who abuse
their powers and who are therefore not attempting to ensure the
company achieves its goals.
Corporate governance
The essence of the corporate governance debate is the effects of the
particular relationship between directors and shareholders. The
greater the separation between the two, the greater the potential
for abuse and also the greater the possibility of suboptimal
behaviour by managers as viewed by shareholders. At present in
the UK there is a voluntary system of governance in place. The
framework has evolved through, or been impacted upon, by six key
reports starting with the Cadbury report in 1992. The various
recommendations of these reports have been incorporated into the
combined code which is included in the Listing Rules of the London
Stock Exchange as an appendix. The rules require a company to
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12 University of London External System
make a disclosure statement in its annual report about its
compliance with the combined code. Though not legally
enforceable, the regulations require compliance and provide for
penalties. Different corporate structures, business, legal and social
environments require different governance requirements and
systems. All this is important because it highlights the differences
between the normative theory and the practical application.
Financial management and risk
Since financial management is concerned with making decisions,
and decision making is concerned with the future and the future is
uncertain, risk must be a major factor in all aspects of financial
management. Risk may be defined as the extent to which what we
estimate will happen in the future may or may not happen. If there
is only one single possible outcome, there is no risk. If there are
many possible outcomes and many of them are very different from
our estimate of the outcome, then there is a lot of risk.
Broadly speaking, both theory and practice show us that risk and
return are correlated. We seek higher expected returns for investing
in riskier projects. Where we perceive little risk (e.g. an investment
in government securities), we are prepared to accept relatively
small returns.
Activity 1.2
_ Choose a few practical situations where a business faces the effect of risk,
(e.g. projecting next year’s sales budget or evaluating a new investment
proposal).
_ Try to identify the causes of that riskiness.
_ Then think of ways to try to measure it and ways to control it.
�See VLE for solution
Financial management and accounting
Financial management is not the same as, or even a
branch of, accounting.
Accounting has been defined as:
the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users
of the information. (American Accounting Association).
Given this definition, it is clear that financial managers will be
major users of accounting information.
Those who work as financial managers may very well have a
background in accounting. In many small businesses one person
combines the roles of accountant and financial manager. Despite
these facts, the role of the accountant and that of financial manager
are distinctly different. The accountant is concerned with the
provision of information: financial managers use information
Chapter 1: Introduction to financial management
University of London External System 13
supplied by the business’s accounting system and other sources to
help them to make financing and investment decisions.
Financial management and taxation
Virtually all decisions taken by financial managers have tax effects.
In the UK, for example, the tax treatment of loan interest is
different from that of dividends paid to shareholders. Therefore the
decision between raising funds from shareholders and from lenders
has tax implications. Returns from investments made by the
business (i.e. profits) are taxed. It is not one of the objectives of this
unit to turn you into an expert on the UK tax system. It is
important, however, that you have a broad appreciation of the
major aspects of the UK tax system, which has much in common
with the tax systems which prevail in other of the world’s countries.
Activity 1.3
Think of similarities and differences between the UK tax systems and another
country you are familiar with. Are there any major differences in the corporate
taxation system?
� A reminder of your learning outcomes
By the end of this chapter, and having completed the essential
reading and activities, you should be able to:
_ describe the general financial environment in which
corporations operate
_ explain the importance and roles of financial markets
_ list/outline the roles financial managers can have within an
organisation
_ outline such things as taxation, accounting information and
form of business and their implications for financial
management
_ give examples of the various objectives a company may have
and why the main objective is deemed to be shareholder
wealth maximisation
_ explain and give examples of how the influence of risk will
permeate all aspects of financial management, the theories
presented, the appraisal and selection, the changes suggested,
and the control methods used.
Practise questions
1. Consider what objectives might be important to a company
other than shareholder wealth maximisation. Describe these
objectives and show how there may or may not be consistency
between the different objectives. Discuss the implications of
your findings.
59 Financial management
14 University of London External System
2. How might a manager’s objectives differ from those of the
company? What are the implications for corporate policies in
order to ensure congruence between the sets of objectives?
Problems
In BMM, attempt the following problems:
_ Chapter 1, p. 23, numbers 2, 5, 7, 8 and 9
_ Chapter 2, pp. 44 and 45, numbers 4, 10 and 17
_ Chapter 3, p. 65, numbers 2, 3 and 4.

The objectives or goals or financial management are- (a) Profit maximization, (b) Return
maximization, and (c) Wealth maximization. We shall explain these three goals of
financial management as under:

(1) Goal of Profit maximization. Maximization of profits is generally regarded as the

main objective of a business enterprise. Each company collects its finance by way of
issue of shares to the public. Investors in shares purchase these shares in the hope of
getting medium profits from the company as dividend It is possible only when the
company's goal is to earn maximum profits out of its available resources. If company
fails to distribute higher dividend, the people will not be keen to invest their money in
such firm and persons who have already invested will like to sell their stocks. On the
other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production,
sales an management. A few replace the goal of 'maximization of profits' to 'fair profits'.
'Fair Profits' means general rate of profit earned by similar organisation in a particular
area.

(2) Goal of Return Maximization. The second goal of financial management is to

safeguard the economic interest of the persons who are directly or indirectly connected
with the company, i.e.,shareholders, creditors and employees. The all such interested
parties must get the maximum return for their contributions. But this is possible only
when the company earns higher profits or sufficient profits to discharge its obligations to
them. Therefore, the goal of maximization of returns are inter-related.

3. Goal of Wealth Maximization. Frequently, Maximization of profits is regarded a the

proper objective of the firm but it is not as inclusive a goal as that of maximising it value
to its shareholders. Value is represented by the market price of the ordinary share of the
company over the long run which is certainly a reflection of company's investment and
financing decisions. The log run means a considerably long period in order to work out a
normalized market price. The management ca make decision to maximize the value of its
shares on the basis of day-today fluctuations in the market price in order t raise the
market price of shares over the short run at the expense of the long fun by temporarily
diverting some of its funds to some other accounts or by cutting some of its expenditure
to the minimum at the cost of future profits. This does not reflect the true wort of the
share because it will result in the fall of the share price in the market in the long run. It is,
therefore, the goal of the financial management to ensure its shareholders that the value
of their shares will be maximized in the long-run. In fact, the performances of the
company can well be evaluated by the value of its share.

In the light of this wide diversity of organisational practices, it is not surprising to find
that in most of the company, financial officer is responsible for the routine finance
functions. The main responsibilities of the financial officer are as follows:

(1) Financial Planning. The main responsibility of the chief financial officer in a large
concern is to forecast the needs and sources of finance and ensure the adequate supply
cash at proper time for the smooth running of the business. He is to see that cash inflow
and outflow must be uninterrupted and continuous. For this purpose, financial planning is
necessary, i.e., he must decide the time when he needs money, the sources of supply of
money and the investment patterns so that the company may meet its obligations properly
and maintain its goodwill in the market. The financial manager is also to see that there is
no surplus money in the business which earns nothing.

(2) Raising of Necessary Funds. The second main responsibility of the financial officer
is to see the nature of the need, i.e., whether finances are required for long-term or for
short-term. He must assess the alternative sources of supply of finance taking into view
the cost of raising funds, its effect on various concerned parties, i.e, shareholders,
creditors, employees and the society, control and risk in financing and elasticity in capital
structure etc.

(3) Controlling the Use of Funds. The financial manager is also responsible for the
proper utilization of funds. Assets must be used effectively so as to earn higher profits;
inflow and outflow of cash must be controlled in a manner so as to meet the current as
well as future obligations; unnecessary expenditure should be curtailed and there should
be left no possibility for misappropriation of money.

(4) Disposition of Profits. Appropriation of profits is one of the main responsibilities of

the financial manger. He is to advise to the top executive as how much of the profits
should be retained in the business as reserves for future expansion; how much to be used
in repaying the debts; and how much to be distributed to the shareholders as dividend. On
the basis of the advice given by the financial mange, the resolutions regarding
depreciations, reserves, general reserves and distribution of dividends are carried out in
the meeting of the board of directors of the company.

(5) Other Responsibilities. Over and above, the responsibilities sated above, there are
certain other responsibilities of the financial manger. These are:

(a) Responsibility to owners. Shareholders or stock-holders are the real owners of the
concern. Financial manger has the prime responsibility to those who have committed
funds to the enterprise. He should not only maintain the financial health of the enterprise,
but should also help to produce a rate of earning that will reward the owners adequately
for the risk capital they provide.

(b) Legal Obligations. Financial manager is also under an obligation to consider the
enterprise in the light of its legal obligations. A host of laws, taxes and rules and
regulations cover nearly every move and policy. Good financial management help to
develop a sound legal framework.

(c) Responsibilities of Employees. The financial management must try to produce a

healthy going concern capable of maintaining regular employment at satisfactory rate of
pay under favourable working conditions. The long term financial interests of
management, employees an owners are common.

(d) responsibilities to Customers. In order to make the payments of its customers' bill,
the effective financial management is necessary. Sound financial management ensures
the creditors continued supply of raw material.

(e) Wealth Maximization. Prof. Soloman of Stanford University has argued that the
main goal of the finance function is wealth maximization. The other goals may be
achieved automatically.

In the light of the above discussion, we can conclude that the main responsibility of the
financial manger is not only to maintain the financial health of the organisation but also
to increase the economic welfare of the shareholders by utilizing the funds in an effective
manner.
The essential characteristics of an ideal capital plan may briefly be summarised as
follows:-

(1) Simplicity. The capital plan of a company should be as simple as possible. By

'simplicity' we mean that the plan should be easily understandable to all and it should be
free from complications, and/or suspicion-arising statements. At the time of formulating
capital structure of a company or issuing various securities to the public, it should be
borne in mind that there would be no confusion in the mind of investors about their
nature and profitability.

(2) Foresight. The planner should always keep in mind not only the needs of 'today' but
also the needs of 'tomorrow' so that a sound capital structure (financial plan) may be
formed. Capital requirements of a company can be estimated by the scope of operations
and it must be planned in such a way that needs for capital may be predicted as accurately
as possible. Although, it is difficult to predict the demand of the product yet it cannot b
an excuse for the promoters to use foresight to the best advantage in building the capital
structure of the company.

(3) Flexibility. The capital structure of a company must be flexible enough to meet the
capital retirements of the company. The financial plan should be chalked out in such a
way that both increase and decrease in capital may be feasible. The company may require
additional capital for financing scheme of modernisation, automation, betterment of
employees etc. It is not difficult to increase the capital. It may be done by issuing fresh
shares or debentures to the public or raising loans from special financial institutions, but
reduction of capital is really a ticklish problem and needs statesman like dexterity.

(4) Intensive use. Effective us of capital is as much necessary as its procurement. Every
'paisa' should be used properly for the prosperity of the enterprise. Wasteful use of capital
is as bad as inadequate capital. There must be 'fair capitalisation' i.e., company must
procure as much capital as requires nothing more and nothing less. Over-capitalisation
and under capitalisation are both danger signals. Hence, there should neither be surplus
nor deficit capital but procurement of adequate capital should be aimed at and every
effort be made to make best use of it.

(5) Liquidity. Liquidity means that a reasonable amount of current assets must be kept in
the form of liquid cash so that business operations may be carried on smoothly without
any shock to therm due to shortage of funds. This cash ratio to current ratio to current
assets depends upon a number of factors, e.g., the nature and size of the business, credit
standing, goodwill and money market conditions etc.
(6) Economy. The cost of capital procurement should always be kept in mind while
formulating the financial plan. It should be the minimum possible. Dividend or interests
to be paid to share holder (ordinary and preference) should not be a burden to the
company in any way. But the cost of capital is not the only criterion, other factors should
also be given due importance.

Introduction to Financial Management - Presentation Transcript

1. Financial Management Introduction

2. Role of Finance Payment of wages and salaries Maintenance of financial records

Production of organisations annual accounts Analysis of Accounting info e.g. ratio
analysis Payment of accounts and credit control Preparation and monitoring of internal
financial information (e.g. budgets) Copy into your class jotter

3. Role and importance of financial management

o Vitally important to success or failure of an organisation. Efficient financial

management has to:

o Ensure funds available to achieve objectives e.g.

  pay bills - materials, electricity, advertising

 pay wages and salaries

 acquire resources

 develop new products

o Ensure costs are controlled

o Ensure adequate cash flow

o Establish and control profitability levels

4. Question

o In your own words, explain the role and importance of financial

management to a manufacturer whose objective is to improve quality.

o (4 marks)

5. Solution

o 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)

o to make sure there is enough money to recruit and train appropriately

skilled staff to satisfy the objective of improving quality. (1)

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

o to make sure that the organisation is performing profitably and efficiently

without compromising quality (1)

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

6. Question

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

o (2 marks)

7. Solution

o Marketing department may require cash in order to carry out promotional

activities e.g. advertising, free gifts

o Marketing may wish to discount price

o Marketing may wish to use techniques like BOGOF

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

8. Payment of wages & salaries

o Work closely with HR department to calculate wages/salaries

o 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.

o Most organisations use Bank Automated Credit System (BACS)

o 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

9. Payment of accounts

o Accounts fall into CASH or CREDIT categories.

o CASH accounts

o Normally paid to companies or individuals that the business doesn’t deal

with on a regular basis.

o Normally paid using petty cash .

o Imprest used to meet daily cash expenses of the business.

o CREDIT accounts

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

o Amount and timescale dependent on ‘ credit history ’

10. Question

o Distinguish between a cash account and a credit account.

o (1 mark)

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

o (3 marks)

11. Solution

o 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.

12. Maintenance of financial records

o Companies must maintain financial records - a history of the business’s

activities.

o Inland Revenue require businesses to retain financial records for a period of

6 years for possible i nvestigation.
 o Limited companies must comply with Companies Act of 1985 & 1989 which
states that it is an offence not to maintain proper financial records.

13.
o Managers and decision makers can make informed judgements and
decisions based on financial information identified by the finance department.

Identify financial information for decision makers Cash Flow Financial Statements and
Reporting Financial Analysis Budgets

A project manager is like a conductor of an orchestra. You inspire

the ultimate performance by creating the right environment. Then
you lead, direct and motivate.