Lesson 1 Flashcards
means planning, organizing, directing and controlling the financial activities.
Financial Management
means applying general management principles to financial principles of the enterprise.
Financial Management
10 Importance of Financial Management
- Financial Management helps businesses succeed.
- Follow rules and manage taxes.
- Get better access to finance.
- Control business costs.
- Measure your success.
- Improve weak areas.
- Optimizing marketing activities.
- Focus on growth areas.
- Enhancing staff strength.
- Predict risks and avoid them.
Another problem that arises from not managing finance is bad planning and missing opportunities to improve profits. One can say with certainty that a lack of management of money will undoubtedly lead to businesses failing. Without experts in this subject, it is possible that business owners may overestimate revenues and plan for more expenses. They will be caught by surprise and be at a loss to know what to do.
Financial Management helps businesses succeed.
Helping companies to maintain their books and mitigating tax burden are essential functions of financial management. Maintaining proper accounts is very important for all firms. This will not only help to follow regulations but also make tax calculations very easy. Finance departments also help to know what taxes to be paid. They also help in finding legal ways to reduce a company’s tax burden.
Follow rules and manage taxes
All companies need money to run businesses and to expand them. They must look at various sources for this valuable commodity. Finance managers help in finding suitable sources that will not be very expensive. They will also be able to advise business people about what methods to raise funds are most appropriate for their companies. These experts will also prepare business plans to convince lenders to finance that firm.
Get better access to finance.
Every company spends money on its regular operations. Companies must meet certain essential fixed costs. Sound financial management will help to cut costs. Budgeting is one of their responsibilities, and this helps to plan and reduce expenses. By spending within available funds, it is possible to minimize unnecessary bank charges. Reasonable control of costs will provide for surpluses that can be invested wisely to earn more.
Control business costs.
Money is the benchmark used for a company’s success. When they earn more money, they are said to be more successful. But one would need strict financial management to improve earnings. Organizations also need these professionals to work out how much profits they have made and compare it with previous years. Financial experts also see how a company has performed vis-a-vis its competitors. Such information motivates everyone in a firm and makes them work harder.
Measure your success.
Finance heads use analytics to know which areas in a business are bringing profits. They can give reports about how various departments in an organization are performing financially. It is also a function of financial management to assess what products are giving better profits. They can process this information for every activity of a business. Such analysis will help in improving weak areas and support profitable activities to perform better.
Improve weak areas.
Marketing is a vital activity for any firm because it helps bring in revenue. But it is also a department that spends a considerable amount of money. So, one must necessarily know what returns each campaign brings. If any advertising program is not earning much, it must be optimized or temporarily stopped. Finance managers provide accurate information about returns from marketing campaigns.
Optimize marketing activities.
All companies must expand their activities to grow. But there must be concrete information about where it is most beneficial to invest to improve earnings. Finance departments can help identify such areas where spending money can bring in excellent returns. It may be possible that investing in new machinery will help to increase production and satisfy new market demands. This is a significant role of financial management in business.
Focus on growth areas.
Despite rapid automation of various processes in organizations, there is no way machines can replace humans. Devices also require people to program and operate them. This is why the human workforce is very crucial for any firm. But employing more people will need additional expenses. Financial management helps in finding out which positions are most profitable to fill. It will also enable companies to increase salaries to deserving employees.
Enhancing staff strength.
The role of finance departments includes forecasting future events using analytics. It helps to know risks that can occur in the coming period. Comparing actual results with forecasted figures will also help to know if there is any area that needs to be taken care of. Companies can be aware of downturns in their financial position and take care to act against that. Finance managers also continue to study markets to know factors that are likely to affect a company’s position.
Predict risks and avoid them.
Major Roles of Financial Management
•Financial Planning
•Financial decisions and control
•Capital Management
•Allocation and utilization of financial resources
•Cash flow management
•Disposal of surplus
•Financial reporting
•Risk Management
To this end, they use available data to understand the needs and priorities of the establishment as well as the overall economic situation and make PLANS and BUDGETS for the same. This is an important task that helps maintain financial stability by balancing outflow and inflow of CASH.
Financial Planning
Managers make use of techniques like ratio analysis, financial forecasting, profit and loss analysis, etc. These are all tasks that help a firm understand how efficiently they are working and what activities will help them improve their earnings.
Financial Decisions and Controls
As part of financial management functions, these officials must estimate the CAPITAL requirements of the organization from time to time, determine the capital structure and composition, and make the choice of source of funding for the capital needs. This ensures that a company has enough cash flow to meet its immediate and distant needs for smooth operation. Companies can complete day-to-day expenses and short-term financial commitments quickly.
Capital Management
Financial management ensures that all financial resources of the organizations are used and invested effectively and efficiently so that the organization is profitable, sustainable, and viable in the long run. Companies are working in a highly competitive environment, and this makes it necessary for finance heads to ensure that available funds are used most beneficially. This activity probably answers the question of what is financial management ideally.
Allocation and Utilization of Financial Resources
It is extremely important for organizations to have sufficient working capital and CASH FLOW to meet their operational expenses and emergencies. Financial management tracks account payable and receivable to ensure there is the adequate cash flow available at all times. This is the role of financial management that is vital in all companies but especially crucial for small establishments as a shortage in cash flow can affect their functioning badly.
Cash Flow Management
The decisions on how the SURPLUS or profits of the organizations is utilized are taken by the financial managers of the organizations. They decide if dividends should be distributed and how much, and the proportion of profits that must be retained and plowed back into the business. It is also paid to employees as a bonus for performing well.
Disposal of surplus
Financial management maintains all necessary reports related to the finance of the organization and uses this as the database for forecasting and planning financial activities. Reporting is a very important function for all organizations. It is a way of knowing the firm’s financial position and performance. This is usually done periodically, either on a quarterly basis or annually. It tells how much money is there, where it came from and what expenses were incurred in that period.
Financial Reporting
Sound financial management prepares the organization to forecast risks, put in place mitigation plans as well as meet unforeseen risks and emergencies effectively. No company is safe from risks. There can be dangers from various sides. Market conditions can result in a sudden drop in sales. Government policies could increase tax or other burdens. Exchange rate fluctuations can affect import and export firms. Companies also face problems from internal issues like machine failures.
Risk Management
