Financial management is one of the most vital responsibilities of business owners. Imagine the negative impact or consequences of making one bad financial decision on your business. This article will help you have a better understanding of financial management because it contains a detailed explanation of the functions and importance of financial management.
It also includes practical examples of financial management. This is to enable you to be able to apply this knowledge in your firm or business.
What is financial management?
Financial management refers to the process of strategic planning, controlling, monitoring or directing of financial resources in an organization. This is done with the aim of achieving an organization’s financial goals and objective.
In financial management, some management principles are applied to profits, expense, cash and also credit. Any organization with a good financial management has a maximized value.
Importance of Financial Management
The importance of financial management in an organization cannot be overemphasized because there is no efficient business without proper management of finance or efficient corporate finance. This management includes acquisition, allocation and management of finance in a business. With finance being the lifeblood business its management is not left out.
Some of the importance of financial management includes;
It helps to decide the requirements of the business financially. Which means that financial planning is very important in every business. This is like the first step to take in managing finance.
Financial management is very important in because the business financial transactions will be very transparent. For a business owner, the finance sector is one of the most important sectors, they want to know the slight details of what’s going on in the business.
Therefore, with a proper management of finance, every financial information will be documented for easy reference.
Another good part of this is that mangers of other departments and some senior staffs see the company’s financial performance. This will help them to know how much effort to put in whereas, how their decisions can make a huge impact in the business.
Proper utilization of funds in a business reflects the effectiveness of their financial management. This is a major importance of financial management. Meanwhile, effective utilization of funds means that there are strategic management techniques they use; budget control, ratio analysis, financial accounting, profit analysis etc. These techniques in return will create more profit for the business.
Stronger financial controls
Finance management makes a business to have a firm financial control. There are methods, procedures, and system of finance management. Some of these might need some management software that help for a faster and better experience. For instance, there is a software that helps in financial accounting, using this certainly makes accounting easy and at the same time controls finances.
The value of a firm is tied to its finances because every investor checks the past and present cash flow of the firm before they invest. When these finances are managed properly it will attract more investors because the dividends will keep getting more attractive as a result of proper management. At this point, the value of the firm keeps increasing.
Other importance of financial management includes;
- Makes production faster
- It provides guidelines for earning maximum profit with minimized cost
- Helps to provide economic stability
- Helps the business make informed decisions in critical times
- Employees become more aware of saving funds.
Objectives of Financial management
Financial management has both long and short term goals. The major objective of financial management is to maximize profit while the major short term objective is to maintain a proper cash flow in the business.
Below are some more objectives of financial management;
Maximize shareholders wealth
This ensures regular and constant returns to investors or shareholders. This depends on how much they earn, the market prices of the shares. Every business wants to increase what their shareholders earn, will increase their value.
Availability of Funds
To make sure funds are available when needed in business is one of the objectives of finance management. No firm or business can function without funds. However, when funds are not available in times of need, it will affect the business or firms in a negative way.
To Ensure funds are Safe
This is a very vital objective of finance management. Because if the major objective is to maximize wealth then it sure needs to be safe or handled safely. Therefore, investment risks should be as minimum as possible to ensure safety on investment hereby investing in safe ventures to avoid loss of funds.
Proper Utilization of Funds
Funds should be used at maximum to minimize cost as much as possible. In as much as a firm needs funds, a person with financial literacy skills is also needed to manage the funds properly. Every firm or business needs to cut down necessary costs. For instance, renting a very large space when it’s not needed yet, or buying production materials in excess.
To have a sound capital Structure
A sound capital structure needs a combination of debt and equity capital, at most a balance. Giving too much equity will be bad for any business, whereas controlling the cost of capital can help get that balance.
Functions of Financial Management
The below functions of financial management below are what makes financial management very important.
#1. Estimate capital required
The first thing a financial manager of any business or firm should do is to make an estimate of the number of funds the business requires. Over time, the financial manager should have studied how the business runs and should be able to estimate the required amount without losing the earning capability of the business.
#2. Determining capital structure
After determining the number of capital structures need formation. It involves short and long term debt-equity. However, all these are dependent on the amount of capital the business has. The financial manager will need to strike a balance between debt and equity capital.
#3. Sources of funds
This is a very important function of financial management. Every business needs to keep raising a running capital, there are various ways to do this. One prominent way is to invest in safe ventures in order to get regular returns. Importantly, the investment decision needs to reduce cost and maximize value. That is to say, investment should be made when there is a greater possibility of earning.
#4. Allocation/ Control funds
When the business earns their net profit over a period of time, it is the job of the financial manager to allocate it properly. This is where strategic planning comes in, the decision of how much to reinvest, save, and the part to allocate to shareholders as their dividends.
It is important to know that these decisions are not static they can be influenced by the present situation of things in the firm or business. Meanwhile, the standard and rules of that business will be maintained.
#5. Monitoring Financial Activities
It is the function of the financial manager to monitor all financial activities in the firm. Because financial activities are delicate, any little mistake can result to a great damage. Allocation of financial duties should equally be done carefully and closely monitored.
Types of financial management
Every business or firm needs management in their finance for various activities. For instance, Loan approval, employee recruit, credit ratings, cash flow management etc. All these above mentioned activities lead to the categorization of financial management into 3 primary types. However, these types of financial management work towards achieving a common goal.
Here are the 3 primary types of financial management;
#1 Treasury and Capital Budget Management
This is the process of planning in order to decide if a firms fixed assets worth fund allocation using the capitalization structure i.e. profit earnings or debt and equity. Fixed assets could be new plants or machineries. Various strategies are used in capital budgeting. For instance, payback period, net present value, equivalent annual cost, rate of return etc.
#2 Capital Structure Management
Capital structure management is a type of financial management in which the firm or business is financing while trying to balance or mix debt(bond) or equity (retained earnings) securities.
In this type of financial management, the financial managers are responsible for capital structure of a business short and long term debts, equities and stocks. This is a major aspect in capital structure.
Therefore, when you hear capital structure of a business, it most times refers to the business debt-to-equity ratio, this will give you an insight on how much value the organization has financially.
#3 Working Capital Management
This type of financial management intendsto keep full records of the business current assets using some accounting strategies like booking. These accounting strategies helps to keep track of current liabilities, cash flow, working capital ratio etc. Capital management has a primary role which is to make sure the business has enough liquid cash to enable the meet up with short-term debts and operational costs.
The team involved in this type of financial management has to make sure the firm more business maintains their working capital because it will improve the company’s earnings.
Financial Management Jobs
First, you should know that people that mange finances in a business or organizations are called financial managers. They are responsible for the financial strength of the organization. Therefore, they prepare reports or make a financial account, monitor and organize everything concerning finance in the business.
Below are some places you can work as a financial manager or where you can employ them;
Financial managers can work as branch managers in financial firms because they can oversee, customers’ accounts, shareholders, recruitment process, loans approval. Etc.
Any job that requires risk management especially when it has to do with finance can be handled by a financial manager. They use some strategies to limit financial losses especially those that stem from a price change, investments, currencies, etc.
A cash manager monitors and supervises the flow and allocation of cash in a business, which is a very essential function of financial management.
Credit managers are in control of the policies, terms and procedures in issuing out credits.
Treasurers and finance officers
They manage investments, cash management, organize cash-raising strategies. Very importantly, they make sure mergers and expansions favour the organization.
Other jobs include;
- Financial controllers
- Risk and Insurance managers
- International finance managers
Note: Some financial managers can work as consultants, freelancers and they can also take contract jobs.
Financial management Pdf
These pdfs are recommended to help you understand the management of finance better. It also contains more financial management examples for a better learning experience.
- An Overview of Financial Management
- Financial Management by C. Paramasivan and T. Subramanian
- The basics of financial management for small community Utilities.
- Financial managers for entrepreneurs
Financial management examples
Like stated above, types of financial management are based on activities of the business. For a business, financial managing examples include; project budget, recruiting a new employee, purchasing materials etc.
Example 1 of financial management;
A company, M series wants to get a loan to help them rent a working space for the business.
The financial management team, will need to analyze this decision before it turns into action. They will have to weigh their options; the will calculate the number of years they want to rent it. And then, how much they will have to invest in payments to know if investing that much in that number of years will strengthen or cripple the business.
Furthermore, they can decide to check the possibilities of even making a whole space purchase.
These are the processes M series will go through before renting a space.
Example 2 of financial management
This example of financial management is for individual or family.
For instance, If Mr. Waters wants to buy a house on mortgage loan where he will be contributing some amount of his salary, to enable him reach his goals financially.
Mr. Waters previously employed a financial manager for some consultations and the financial manager advised him to use the 50/30/20 planning strategy which means;
Firstly, He will use 50% of his salary on life necessities. Like, house rent, transport, food, groceries, basic bills etc.
Secondly, 30% of it goes to the way that suites his lifestyle. For instance, if Mr. Waters likes to eat out on weekends, attend music classes, play golf
Lastly, the last 20% will move towards planning for the future, retirement plan, investment, and debt payment.
In simple terms,
50% to wants
30% to needs
And 20% to savings and future
Due to some changes in Mr. Waters life the financial manager will need to adjust this 50/30/20 rule to be able to suit the agreed 75% of his salary.
In conclusion, from the above explanation especially on the functions and examples of financial management above. I am sure you now understand that every business, firm organization needs financial management for efficient functioning. In other words, the importance of financial management can’t be overemphasised.
However, if you don’t have any professional managing your finances, it is advised you employ a financial or consult one for better business yields.
4 Essential pillars to gaining trust in business.
When we talk of trust, people think only of integrity, keeping promises and being nice. While this is true in a few relationships, however, in business, it’s a different ball game. The following are the 4 Essential pillars to gaining trust in business. While 2 hinges on character, the other 2 hinges on competence.
When your business is perceived as been able to deliver to its promises. The values are unbending and guided by principles. There’s this temptation in business to temper with quality in other to cut costs and increase profit while making your customers believe your business has the best of quality. You might sell that trick only in the short run. Integrity is important in business. Staying through to the values of the business and having enough courage to make it known that this is your stand not only earns you some trust, but it also helps you build a brand too. While integrity is necessary, with it alone, you can’t earn trust. It is essential in gaining trust in business.
Intent springs from our character. It is part of our value system. It is how we know we should act. Covey in his book Speed of Trust breaks intent down to three things.
Motive is why you do what you do. The best motive for building trust is genuinely caring about people. If you don’t care and have no desire to care, be honest, and let people know you don’t care. If you don’t care but want to care, start to do caring things. Often, the feelings will follow the actions.
Agenda stems from our motive. The best agenda is honestly seeking what is good for others. Notice that your agenda is much more than wanting what is good for others, but seeking what is good for others.
Behavior is putting your agenda into practice. It is what we do base upon what we intend to do and what we are actively seeking. Behavior is where the rubber meets the road. Behavior is important because it is what people see and judge. Telling someone you love them is important, but showing them you love them is essential.
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This includes the talents, skills, knowledge, capacities, and abilities that our business have that enables it to perform with excellence.” To can think of it as TASKS: Talents, Attitude, Skills, Knowledge, and Style. A construction company with 100% integrity and right intentions but have no capability to build a “sky bridge”, would never be trusted with such task. So here comes the question
Would you rather work with one with integrity but has no competency or one with competency but without moral values and integrity?
This has always been the dilemma of companies in hiring staff. A surgeon walks up to you before an operation and says “Hi, I’m Sally I understand your condition and care a lot. I will operate on you though I don’t know how to.” How much of trust would you give?
People don’t trust people who don’t deliver results. This is another factor in gaining trust in business.
Results are the deliverables. They are what you contribute to the company. You can’t hide from your results. A business with good customer reviews on its site and awesome testimonials will easily gain the trust of customers than companies that don’t have such on their sites.
“If the results aren’t there, neither is the credibility. Neither is the trust. It’s just that simple; it’s just that harsh.”- Covey stephen
There are three areas of results people look at to judge your companies credibility. First, your past results: what you have proven you can do, your successful track records. If the doctor Sally walks up to you with words like “hi, I am Sally. I care a lot and understand your condition. I and my team have recorded 90% success in similar cases in the operating room.” You will find it much easier and will be at peace to give trust.
Second, your current results: what you are contributing right now. Studying the stock market has shown that people buy more stocks when stocks are rising. Don’t succeed silently, let your success be known as this will gain you trust in your business.
Third, your potential results: what people anticipate you will accomplish in the future. When investors see a big potential in a companies ability to command profits in the future despite the current profit margin, they’ll trust their fund with such companies. The case study for this is the rise of Twitter. When you think of trust in business think in terms of these pillars
These are the essentials to gaining trust in business.
Business Ethics Definition: pros and cons to managers [case study]
How has Business Ethics helped companies and business in the past? What are the pros and cons, how can managers adopt a good organisational culture that helps to ensure they follow beneficial business ethics that would favour their businesses? This is what this journal would show you.
What is Ethics
Ethics is simply a guiding philosophy of what is wrong or right. A set of standards that defines what good practice is and what a bad practice is. Almost every field of study has its ethics. It doesn’t necessarily mean the actions are bad in the real world but are considered bad in their system of running things in that field.
For example in the field of medicine, there are ethics that guides what medical professionals are supposed to do and what shouldn’t be done if one doesn’t want his licence revoked. In some countries, abortion is considered bad ethics and can cost a medical practitioner his license if caught. But on extreme cases of complicated pregnancy issue that aborting the baby is the only option for a pregnant mother to survive, the same abortion is considered a good ethic.
So ethics are standard set and agreed upon to be the guide to what is right or wrong in the course of discharging one’s duties. How does this apply to business?
What is business ethics and its importance?
Business ethics is the study of acceptable practices, policies and guidelines that directs how businesses run their activities. There are 2 major things that determine business ethics.
- The law and government policies: The government through certain bodies sometimes set acceptable standards businesses should follow to ensure that certain standards are enforced or maintained. As seen in most industries.E.g pharmaceutical.
- Public approval: The ethics practices that make business acceptable before the public. This has given birth to what we know as Corporate Social Responsibility (CSR). Though most businesses today take up CSR not because they have a genuine interest to help but because they want to gain public acceptance.
So, to some business, it has become more of a brand strategy (see Google brand strategy) to penetrate and gain market acceptability instead of genuine interest in people.
Understanding Business Ethics
Business ethics are basically a moral code between right and wrong practices in business. It goes beyond this to transcend into what businesses can do to gain public trust.
Business ethics has evolved when the public started becoming sensitive to how business practices and activities affect society. For example, when telecommunication companies started mounting masts close to homes, people became concerned to how it affects homes close to the locations which forced the telecom companies to unleash compensations plan and roll out corporate social responsibilities for affected communities.
Beyond this, Business ethics attempt to reconcile what companies must do legally versus maintaining a competitive advantage over other businesses. Firms display business ethics in several ways. Therefore beyond gaining the trust of the public businesses try to incorporate ethics that will keep your business ahead of competitors.
Difference between business ethics and organisational culture.
- Organisational culture has a slim difference, it’s a set of standard set and enforced by an organization to mould the behavioural patterns of its workers and management. While ethics are set by the law or policies from government bodies and other external factors that help an organisation gain public trust. Thus, organisational culture is internal practices that increase internal business operations while ethics are persuaded on the business from what is acceptable on the external(society).
- Organisational culture can be formed unconsciously as practices done over time within the organisation can become a culture which makes or Mars the business while business ethics are adopted deliberately and consciously.
The two should not be mistaken or interchange.
Business Ethics examples [Case study]
Here is a case study. A food processing company A that wants to abide by what is acceptable to the public uses 100% natural ingredient to formulate their food and in order to gain a competitive advantage and win market share might want to include that information on their label but limited by their governing body’s acceptable standard of what should be written and what shouldn’t be written in a product label. Thus has followed ethical procedure but cannot enjoy the competitive advantage that comes with it unless they find a way to communicate the benefit to the public without violating the ethics of the governing body.
Another Business Ethics examples or case study is a food processing company, B that wants to gain market share so on their label they highlight the use of highly rich fibre nutrients to produce their product because of its ability to fight and prevent cancer. But in the true sense, such fibre nutrient is not in the nutritional composition of their product. They might do this to gain public trust and acceptability but will stand the risk to be penalized by government agencies of food-related matters which might cost them closing down the business. which of these Business Ethics examples would you adopt?
How should managers use ethics to their benefits?
In the first Business Ethics examples (case study), business ethic wasn’t favourable for the manager. while in the second, the manager can pull those tactics as long as he isn’t caught. Managers must understand that interest of the public with all wellness, integrity and trust is more important than the interest of the businesses. If the interest of the public is satisfied, the business will thrive and achieve its own interest either in the short run or long run. Managers must understand that intersection point between the interest of the business, the interest of the public, that of the government and other parties involved in trying to implement and adhere to business ethics. That intersecting point is the point of win-win for everyone involved. If one is violated, it affects the business negatively.
If the business should breach the government policy, the business is penalized. If they destroy the trust they have from the public, they lose sales. The intersection point is the sweet spot of benefiting from business ethics.
4 bad habits of entrepreneurs that killed Nokia and Blackberry and what you should learn from it.
Businesses fall and rise even giants are no exception due to certain bad habits of entrepreneurs. Business doesn’t run itself, it’s people that run business no matter the system you put in place. Some prominent products we used to know years back are no longer in the market now just like some big business names, we don’t hear of them anymore.
Despite all these, some businesses have scaled through the test of time because they know how to make a business work so, against all market tests and competition are still at the top of their games. What are these things that differentiated these lasting brands from other failed brands? What were these bad habits of entrepreneurs that killed these brands?
Complacency is that feeling that makes you think that you’ve arrived, it’s one of the most negligible bad habits of entrepreneurs. It’s difficult to climb to the top but it’s more difficult to stay at the top. Nokia used to be the most valuable brand when it comes to phones but today they are not even among the top 7. What about blackberry? They are nowhere to be found anymore. What happened? They stopped making efforts to grow, they became complacent simply because they have come to the top where it looked so impossible to be disrupted and overthrown.
Never come to a point in business where you stop making effort or get too relaxed or get too stuck over celebrating your win that you no longer push forward. Excellence is a journey, not a destination. Every day a lion wakes up in the jungle knowing that if it must eat, it must run faster than the gazelle. Same with the Gazelle who wakes up every morning knowing that if it must live, it must outrun the lion. Business in an open market system is simply like a jungle. You’re either on the menu or you’re on the table eating the menu.
2 Deaf to users review
All the complains people gave about the overheating issues and the sluggish hanging problem of blackberry phones, what did they do with all those complains? All the while users requested for more efficient smart devices, why didn’t Nokia listen to the users instead they kept releasing new models that solved no new problems. When other better and smarted phones penetrated the market, users didn’t waste time eradicating their Nokia and blackberry phones. They were simply deaf to user reviews. One of the most silent bad habits of entrepreneurs is thinking that customers aren’t part of the product development team.
Have a platform where you collect user review and feedback about your business. Don’t just collect these feedbacks and reviews, also attend to them. This is one way you know what your customers want from your business and what changes you should implement. If you don’t listen to customers’ complains in your business, very soon you will see no customers anymore.
3 slow to change
Change is inevitable in business, neglecting the possibility for change is one of the bad habits of entrepreneurs. Once in a while, pick your phone and search for future trends in your industry. In 10-15years time automobile companies that don’t make a switch from petrol to electric as means of fueling their cars might soon be out of the market. There was a time we used kerosene lamps, now rechargeable lamps and energy-saving bulbs are everywhere. Nokia didn’t see the change of a new operating system like android hitting the market soon and even when it happened, it took them so much of a long time to adjust to the market despite that android operating system was open source.
Be very quick to change. Never resist change in business. Simply evolve with evolving trends and technology and always be on the move. know what the latest trend is and always search to know how technology is changing your business.
4 Bad partnership – bad habits of entrepreneurs
A partnership can make or kill a business it’s one of the most dangerous bad habits of entrepreneurs. Some banks by merging with another bank have become stronger and better while some business has died as a result of the partnership. Nokia trying to evolve went into a wrong partnership which didn’t solve their problem but killed them the more until they said bye to Microsoft.
Think twice before going into any partnership. Some businesses have been trapped by unnecessary partnerships. If you must, hire the services of a business consultant together with a legal solicitor to help you evaluate and draft the right partnership agreement for your business.
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