There are many challenges to running a business, including ensuring all operational variables are running smoothly. The owner of the company hires managers to help keep the company running smoothly and to get tasks completed.
Any undertaking that requires the coordination of resources and personnel can be considered management. The main challenge of management is to achieve the company’s goals while maximizing efficiency.
In an Introduction to Management you can read more about the requirements of holding a managerial position. In terms of financial management, those responsible have to make sure the budget is managed carefully and money is being spent wisely.
Financial management encompass managing the financial resources of something to achieve better results. This often refers to businesses, but can also apply to other entities such as individuals.
Mentioned below are the key points to financial management: This is a management skill that oversees the financial activities of a company in order to make sure they are organized, planned, and directed in a way that is most beneficial to the enterprise.
Financial management is important in order to: -make business decisions -allocate resources -maximize profits -minimize losses In business, it refers to the process of acquiring and using financial resources in an effective way.
Weston and Bringham say that financial decision making is about achieving enterprise goals while also taking into account individual motives. With the right tools, practices and strategies, businesses can manage their finances effectively.
Since money is always limited, it’s important to manage it well. This is especially important for businesses, as it is a key activity for sustaining any business.
If you don’t manage your finances properly, your business could run out of money to operate. This activity allows businesses to manage their finances so that there is no money wasted.
The financial planning is generally handled by the company’s owners and shareholders. This happens when the company needs someone to help manage their finances.
Making sure that there are appropriate funds available to run the business, pay the employees, and make investments is part of the planning process. It is advisable to have a plan in place for those handling money, before a business opens its doors.
The plan should be assessed often to make sure it is helping the business grow.
If a company does not plan properly, it may not have enough money to cover its working capital budget. This can lead to the company going out of business, making late payments, and not having enough money to keep operating.
Where the business decides to invest its money is also part of the planning process, for example, in stocks, upgraded equipment, or expanding the scope of business. The course “Investing Fundamentals” will teach you how to invest your money in a way that will increase your returns and reduce your investment fees.
Financial managers are responsible for financial planning as part of their overall financial management function. This is a forecast of what the value of a set of variables will be at some point in the future.
It outlines what a company should do to be successful in the future. When making financial decisions, managers must consider numerous factors.
The required documents for this investment include a sales forecast, pro forma statements, asset requirements, economic assumptions, and mode of financing investment. Financial planning can involve creating a budget to track your expenses and income, as well as saving for future goal.
If financial planning is related to investing, then the capital must be allocated to projects for assets that can generate revenue. This may involve starting a new business or introducing a new product.
Forecasting the finances of a company involves estimating its income and expenses for the upcoming year. This text is discussing the process of estimation for cash needs and making decisions on how to raise capital through different sources of funding.
The objective of financial planning include:
What are the capital requirements for this business? The business must look at the duration to determine the requirements. Whether you’re looking for long-term or short-term capital. Capital needs depend on the cost of current assets, fixed assets, long-term planning, and promotional expenses.
Determining capital structure: Capital structure is the composition of capital. This means that the business will need the right amount and type of capital in order to be successful.
When creating a financial plan, you must also create policies for managing money, lending, and borrowing.
One of the most important aspects of financial management is keeping track of company finances. Even if you have a well-thought-out financial plan, you won’t be able to tell if it’s effective unless you track its progress.
The job of financial monitoring includes making and looking at financial reports on a normal basis. This text lists the types of financial reports that are typically included in a business’s financial statement.
These reports include cash flow, working capital, fixed and current assets, revenue statements, accounts payable and accounts receivable.
It is essential to close monitor reports and double-check for accuracy and positive growth to manage a business.
The job of financial managers is to control finances, and company policy makers set the company’s policy. By establishing policies and procedures for financial control, organizations can help prevent the misuse of funds.
The policies include procedures for documenting income and expenditures, the method of financial reporting that is to be used, and the overall approach the company wishes to take to managing its finances.
There are several methods of revenue recognition in accounting which ultimately affect how income is reported and thus how taxes are handled. The methods for pricing construction contracts include cost-recovery, installment, completion, and percentage of completion.
4. Cash Management
One of the aspects of financial management is cash management. Somebody has to decide what to do with all that money. Financial managers need to decide whether to pay back creditors, pay bills, meet current liabilities, or invest in maintaining inventory.
5. Estimating Capital Expenses
While estimating the capital expense, a company must keep the following points in mind:
Therefore, payment should be made as soon as the bill is received. Promotional expenses must be paid as soon as the bill is received, as they are incurred before any receipt.
This means that promoters should be prepared to spend a lot of money on promoting their company, as it is a costly process. Investment is required for this stage, and financial managers need to be prepared.
These include: 1) Bank charges and 2) Depreciation on assets The cost of current assets includes expenses such as bank charges and depreciation on assets. These are daily expenses that fluctuate.
The cost of fixed assets, such as machinery, land, and buildings, can be calculated quite accurately. The valuation helps to estimate how much capital is needed.
Inflation and other economic conditions can have a big impact on the value of fixed assets, so it’s important for financial managers to stay up-to-date on current conditions and be able to adjust asset valuations accordingly. This is extremely important for estimating total capital requirements.
6. Determining Capital Structure
A company’s capital structure is the mix of debt and equity it uses to finance its operations and growth. This is an important function of financial management. Following are the factors that help in determining capital structure:
Loan covenants are restrictions that companies face that prevent them from using strategies that would cover their debts. Once a company reaches a certain level of debt, it becomes difficult for them to raise money from the market. This can have negative consequences for companies in the future.
The capital structure of a company should be sustainable and feasible in order to allow the company to continue growing and making profits. To analyze growth and profitability, a model that sustainable growth is used.
Slack resources can be used to fund unexpected expenses, take advantage of attractive investment opportunities, or provide a financial cushion in the event of a downturn.
Slack resources are additional funds that a company can use to finance unexpected expenses, take advantage of investment opportunities, or as a cushion during tough economic times. It consists of the serviceable and non-serviceable debt capacity of the firm. The more debt capacity a company has, the more flexible it will be.
Debt and non-debt tax shields impact the capital structure of a company by ____________. Debt has some tax benefits attached to it, like the ability to deduct interest payments from taxable income, being able to carry forward losses, and reduced taxes on depreciation.
7. Procurement of Funds
Financial management includes procuring funds to run the business. This includes deciding on the sources of funds.
The company may have different sources to acquire capital. The ways to get funding differ depending on when you need the money. These can include:
- gaining capital in lieu of equity
- releasing IPO to raise money from public
- taking loans from financial institutions
8. Surplus Disposal
The financial manager must decide what to do with the surplus profit after investment and expenditure.
They have to decide if the extra profit should be reinvested in the business as saved profits or distributed as dividends. They can identify the rate of dividends and benefits, such as bonuses.
These are the major functions of financial management. There are many micro-level functions of this type of management. The field of financial management is very large and encompasses more than just the functions listed above.
Other companies or ventures may request that your company becomes an investor. The company may want to attract investors or invest their money in stocks or reinvest in the business.
The financial executives have the authority to approve or reject investment proposals based on the organization’s financial plan and policies.
Financial Management Objectives
The type of financial management approach a company uses is important for how the organization conducts business. They help establish what customer preferences are, what factors influence them and how these can be used to inform decision making and policy creation.
- Profit Maximization
Profit maximization entails increasing profits over their net worth. This is a difficult sell in financial management. Although this plan may help you make more money in the short term, it does not always run smoothly.
In order to maximize profits, anything that can be done to increase profits should be a priority. Profit can either refer to the amount of income the shareholders or owners of a company receive, or to the overall financial efficiency of a business.
The businesses that aim to make a profit generally want to use as little resources as possible to generate a lot of money.
The shareholders can make the most money possible while still running a successful business by only investing the amount of money needed to carry out a money-making financial plan.
It is important to consider what profit means to your company when determining a profit maximization plan. If something will result in more money, let other people know about it.
Stakeholders will not always have the same interests, and there can be conflict. The benefits of a project must be discussed and agreed upon by all stakeholders in order to avoid conflict. If not, there can be complications later.
If a company is focused on profit above all else, it may offer low-quality products or services, or it may cut corners to keep costs low If a company is only focused on making a profit, it might offer low-quality products or services, or try to save money by cutting corners.
The quality of benefits is only a measure of how certain you can be that the benefits (income) will actually arrive. If the benefits are of low quality, they come with a risk.
The same principle applies to high quality items – the assumption is that the benefits will be realized. It’s best not to blindly invest in something just because it seems profitable. You should use your best judgment to avoid a potentially devastating situation.
- Wealth Maximization
A company’s net worth is the sum total of its assets – both financial and physical – minus any liabilities. So, in wealth maximization, the company is trying to increase the value of its assets and/or decrease its liabilities.
This is not to say that profit is not interesting to them, because it is certainly, but they are more focussed on cash flow and dividends.
This financial management technique focuses more on the long-term success and health of the company than on immediate monetary returns.
Although in the past profit was the main goal when it came to financial planning and management, the benefits of wealth maximization are now being realized.
This approach to financial management results in more success for companies, a healthier business environment, and a longer period of time for these benefits.
As opposed to profit maximization’s focus on quantity over quality, wealth maximization takes both into consideration.
They evaluate the investment return, risks, and benefits before making an investment. This objective framework for financial management involves changing cash flow trends.
paramount importance This is of paramount importance because current assets can be appropriately analyzed and the remaining money can be used for further investment, meaning more long-term financial stability.
All business have an executive that calls the shots. Most of the time, it’s a team of shareholders who decide what to do with the money the company makes, and how best to use it to make the company more profitable.
The type of financial objectives a company employs will determine the decisions they make. Some important decisions that need to be made are related to investments, dividends, and working capital.
The Introduction to Financial Accounting course can help you improve your finance knowledge so that you can make better decisions about company money.