Wednesday, 10 July 2019

What is Financial Management

What is Financial Management 

Financial Management

If you were to start a small business of your own tomorrow, you soon would be involved in financial management problems. Having first conceived of a unique product or service, perhaps in a market niche lacking competition, you must then develop a plan. The plan requires answers to some important questions; for instance, what assets will the business require? That is, what premises, equipment, and inventories of merchandise and materials will the business need? The purchase of these resources can require substantial funds, particularly in the initial stages before the generation of
much sales revenue. In other words, you need access to money.


The strategy that you adopt for starting and operating your business will affect the amount of money you will need and when you will need it. If the money is not available at the right time and in the required amounts, you will have to alter your plans. As a result, your problems are those of a financial manager, more specifically, the company Treasurer. You have to translate the operating plan of your business into a financial plan that enables you to forecast how much capital you need and when.


At the same time, in your role as acting Treasurer, you have to begin building relationships with sympathetic bankers prepared to lend your business money when needed. Banks do not like to lend more than half the money that a business needs, because bankers do not like to take too many chances with their depositors’ money. Consequently, before you can borrow you must be willing to risk much of your own funds. If you do not have enough personal capital, you must try to find relations or other people who might be willing to contribute some money. In exchange for their capital, they will want to be part owners of the business and share in its profits. So, your business will require two kinds of capital: debt (the bank’s funds) and equity (the owners’ funds). This is an essential function of financial management: ensuring that your business has adequate funds available to operate efficiently and to exploit its opportunities.


When you have secured the capital that you need to acquire the assets required by the business, you face some further choices. Which assets do you need, and how do you choose between competing ones? If two business machines have different revenue-producing capabilities and different operating lives, you need some financial yardsticks to help you make a choice. How much money will each machine make each month, and for how many years? Is this cash income sufficient to justify the price that you would have to pay for each machine? Does the rate of return on the investment in either machine compare favorably with your other investment opportunities? Answers to such questions require analysis, and financial management is concerned in part with providing the techniques for this sort of analysis. A large company would employ financial analysts to make such comparisons for the company Treasurer.


Once your business is in operation, you will engage in an enormous number of transactions. Sales slips, receipts, and checkbook entries pile up. You cannot rely on memory to handle information in the mounting piles of paper on your desk. Your sympathetic accountant says, ‘‘You need a\ management accounting system.’’ For a fee, he sets up a simple system for you. The system involves keeping a journal that records all financial transactions each day, and various ledger accounts gathering transactions into meaningful categories. The sums in these accounts help you to get your business under control, or to know whether you are winning the battle between profit and loss. If you are losing, the accounts can provide some clues as to what to do about it. For example, they can show whether your prices cover all your costs. Such an accounting system proves necessary but requires effort to maintain. When the business starts generating sufficient cash, you hire a bookkeeper to make the actual entries in the accounts. Still, the system requires some of your time because you must supervise the bookkeeper and interpret what the accounts might indicate about the health of your business.


Now that you are keeping accounts regularly, you have made your outside accountant’s job much easier. At the end of the year, the accountant must add up your assets (what you own) and your liabilities (what you owe). Your total assets less your total liabilities represent your ‘‘net worth’’. If your net worth has increased during the year, you have made a profit, and your company will have to pay a tax on the taxable income.


All this detail requires much help from your accountant. As your business grows, you will be able to hire a full-time accountant, who will keep your accounts, prepare your tax returns and supervise your bookkeepers. A good Chief Accountant can also undertake financial analysis of potential investment decisions and help with financial planning and other treasury functions, including raising funds. Perhaps then your full-time accountant deserves the title of Chief Financial Officer (CFO) because he or she will be performing or supervising all the main functions of finance:
1. Planning and forecasting needs for outside financing.
2. Raising capital.
3. Appraising investment in new assets.
4. Financial reporting and control, and paying taxes.
Financial management mainly concerns planning, raising funds, analysis of project profitability, and control of cash, as well as the accounting functions relating to reporting profits and taxes. A financial manager is an executive who manages one or more of these functions. As we have seen, financial management plays a role in many facets of any business. That is why financial managers participate in virtually all the major decisions and occupy key positions at the center of all business organizations. equipment, and inventories of merchandise and materials will the business need? The purchase of these resources can require substantial funds, particularly in the initial stages before the generation of much sales revenue. In other words, you need access to money.

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