Understanding the Strategic Role of Financial Management

Syllabus Topic

HSC topic: Finance

role of financial management

• strategic role of financial management

The Role of Market-Based Policies in Environmental Management

INTRODUCTION

The strategic role of financial management is a critical component of any successful business, underpinning its ability to achieve long-term goals and sustain growth. Financial management involves the meticulous analysis, interpretation, and evaluation of all financial records. This strategic plan outlines the business's goals, objectives, and future direction, requiring robust financial resources for implementation.

EFFECTIVE FINANCIAL MANAGEMENT

Effective financial management encompasses a range of activities that collectively support the strategic implementation of a business's objectives.

These activities include

• Setting policies and procedures for cash and credit controls.

• Determining the optimal mix of equity and debt for finance raising.

• Rigorous budgeting that monitors both actual and planned performance.

• Maintaining accurate record keeping and leveraging financial statements and ratios for analysis are pivotal in guiding strategic decisions.

POLICIES AND PROCEDURES

Setting effective financial policies and procedures is essential for managing cash and credit within a business.  

Cash flow refers to the balance between income and expenses, and credit control involves management of company accounts to ensure timely payments, so monitoring payment schedules and late payments, and maximising cash flow.

Financial policies establish the rules and principles guiding these accounting and financial practices, reflecting the business's values and culture. These policies ensure alignment with business goals, flexibility, and clarity, making them easily understood and implemented by all employees.

Procedures, on the other hand, provide specific instructions for employees to follow these policies. They detail the steps necessary for managing cash flow and credit, ensuring that financial resources are handled securely and efficiently. By setting clear policies and procedures, a business can maintain robust cash and credit controls, supporting overall financial stability and strategic objectives.

EQUITY AND DEBT BALANCE

Deciding the right balance between debt and equity finance is crucial for a business's financial strategy. Debt finance involves borrowing money from external lenders, such as banks, which must be repaid with interest. In contrast, equity finance involves raising funds by selling ownership stakes in the business, such as through shares, to investors.

Debt Finance

Debt finance offers several options through various financial institutions, including:

• Business Loans: Fixed or variable interest loans for specific purposes.
• Lines of Credit: Flexible borrowing limits for managing short-term needs.
• Overdraft Services: Short-term funding for covering cash flow gaps.
• Invoice Financing: Borrowing against outstanding invoices.
• Equipment Leases: Financing for purchasing business equipment.
• Asset Financing: Loans secured against business assets.

Advantages: Retain full ownership and control of the business, and interest payments are tax-deductible.

Disadvantages: Regular interest payments can strain cash flow and a risk of insolvency if debts are not managed properly.

Equity Finance

Equity finance can be sourced from various avenues, including:

• Self-Funding: Using personal finances and business revenue
• Family or Friends: Raising funds through partnerships or share sales to close acquaintances.
• Private Investors: Attracting funds from business angels or other private investors who may offer expertise.
• Venture Capitalists: Securing large investments from corporations interested in high-growth potential businesses, typically in exchange for significant ownership and control.
• Stock Market: Raising capital by publicly offering shares, though it involves complexity and market risks.
• Government Grants: Obtaining funds for specific purposes like research and development, expansion, innovation, or exports.
• Crowdfunding: Raising small amounts of money from many people via crowdfunding websites.

Advantages: No obligation to repay funds, reducing financial strain, and investors may bring valuable expertise and networks.

Disadvantages: Dilution of ownership and control, and potential conflicts with investors regarding business decisions.

Optimal Mix

Choosing the optimal mix involves assessing the specific needs and circumstances of the business. Factors to consider include:

• Business Stage and Stability: Start-ups prefer using equity (selling ownership shares) to get money because they don't want the pressure of repaying loans. On the other hand, businesses that have been around for a while and are stable might choose to borrow money (debt) to help them grow even more.

• Cash Flow and Revenue Predictability: If a business has steady, predictable cash flow, it can handle more debt (loans). But if the business's income goes up and down a lot, it might need to use more equity (selling ownership shares).

• Growth and Profit Potential: Businesses that are growing quickly and have big potential might get money from venture capitalists. Businesses that grow steadily and predictably might choose to borrow money instead.

• Control Preferences: If owners want to keep full control of their business, they might prefer borrowing money (debt). But if they're okay with sharing control with investors, they might choose to sell ownership shares (equity).

Sources

Investopedia: Strategic Financial Management

Victorian Government: Accounting and financial policies and procedures

Pinnacle Business Finance: Understanding Cash Flow And Credit Control

Business.gov.au: Debt and Equity Finance

Investopedia: How Does Debt Financing Work?

Investopedia: Equity Financing

Investopedia: Lines of Credit explained

Investopedia: Overdraft Explained

Oracle NetSuite: Invoice Financing defined

Investopedia: What is Asset Financing?

Investopedia: Venture Capitalists Definition

Investopedia: What is the Stock Market?

Grant Helper: What is a Grant?

Investopedia: Crowdfunding explained