WHAT IS FINANCIAL MANAGEMENT?
The strategic planning and administration of an organization’s financial resources is known as financial management. It entails examining investments and money to assist in making choices that support an organization’s objectives.
Managing finances can assist with:
- Maximizing the value of shareholders
- Making money
- Reducing the risk
- Preserving financial well-being
- Getting money
- Handling debt
- Considering risk when taking out a loan
- Selecting an investment location
Among the goals of financial management are the following:
- preserving an adequate level of funding for the company
- Ensuring the organization’s owners receive a favorable return on their investment
- The best and most effective use of finances
- Developing legitimate and secure investment possibilities
Financial Management Objectives in Business:
1. Maintaining the company’s financial stability by preventing bankruptcy and making sure it has enough cash on hand to keep running.
2. Increasing profitability through determining the appropriate pricing for current goods and services, phasing out unprofitable goods and services, and assessing the possible profit of future goods and services.
3. Cutting expenses by keeping an eye on expenditures and seeking for methods to cut overhead.
4. Providing venture capitalists, stockholders, and other investors with a favorable return on investment (ROI).
5. Increasing money through a positive return on investment.
Ensuring efficient liquidity management is essential to avoiding the issue of fund shortages and surpluses in financial management. In order to satisfy daily operational needs without having extra money that may be invested elsewhere for higher returns, it is necessary to maintain the proper balance of cash and financial resources. Important tactics for striking this equilibrium include:
1. Management of Cash Flow
a. Cash Flow Forecasting: To foresee any shortages or surpluses beforehand, forecast cash inflows and outflows on a regular basis.
b. Monitoring and Modification: Keep a close eye on actual cash flows and make necessary adjustments in response to any departures from projections.
2. The Management of Working Capital
a. Inventory Control: Maintain enough stock to satisfy demand while avoiding locking up extra funds in unsold goods by keeping inventories at ideal levels.
b. Receivables Management: Make sure cash inflows are guaranteed by promptly collecting outstanding accounts receivable. One way to cut down on delays is to use collection agencies or tighten credit terms.
c. Management of Payables: Pay suppliers on time to preserve good relations and take advantage of any discounts, while managing payables effectively to prevent early payments.
3. Short-Term Loan Alternatives
a. Applying Credit Lines: Keep short-term credit available (such as working capital loans or overdrafts) to meet any unforeseen financial gaps.
b. Flexible Borrowing: Have choices for borrowing that are adaptable to meet any needs for liquidity during high seasons or unforeseen circumstances.
4. Reserves of Cash
a. Keep Emergency Funds on Hand: To deal with unforeseen financial shortages without interfering with daily operations, set aside a reserve or contingency fund.
b. Reserve and Investment Balance: Make sure reserves are adequate but not overly big so money may be used wisely for expansion prospects.
5. Using Extra Money for Investment
a. Investing in the short term: To generate income while preserving liquidity, put extra money into short-term, liquid investments (such money market funds or short-term bonds).
b. Making Good Use of Surplus Surplus cash should be carefully
6. Strategies and Financial Planning
a. Budgeting: Make thorough budgets to monitor income, expenses, and trends in cash flow. Predicting financial requirements and preventing surprises are made easier with proper planning.
b. Financial Objectives: Establish specific financial goals (such as debt management, growth, and profitability) to direct the distribution of money and guarantee that they are available for strategic objectives when needed.
7. Management of Debt and Equity
a. Management of Leverage: Steer clear of an over-reliance on debt, which can limit liquidity, but make sure you have enough borrowing capacity to grow without taking on financial risk.
b. Equity Financing: To balance the requirement for outside funding without overleveraging the business, think about issuing equity (if possible) for long-term growth.
8. Cash Conversion Cycle Enhancement
a. Efficiency in Operations: Delay payables (without compromising relationships) and increase inventory turnover and receivables collection to shorten the cash conversion cycle.
In conclusion,
A dynamic approach is necessary for good financial management, which includes anticipating and modifying for liquidity requirements while making wise investments with excess cash. Both surplus and lack of funds can be avoided by a firm by keeping working capital, short-term financing, and cash inflows in balance and by matching resources to the company’s operating requirements and expansion objectives.
