Finance is always at the core of every business. Nevertheless, like any other ordinary resource, finances are always scarce.
With this comes the need for effective management of financial resources. You may wonder what comprises financial management.
Financial management is the strategic way of organizing, planning, directing, and controlling the corporation’s funds.
This article discusses the nature, scope, objectives, and purpose of financial management. This should help in making financial plans and decisions in any business.
Financial management tips to take up
There are lots of financial issue causes; here are some tips to triumph over this situation.
Finding a working system
Once you get a workable system, stay away from getting a distraction from contradictory financial advice.
It is tempting to try out how to get quick or easy money. But if you are saving, building security, and meeting financial goals, then continue saving. Your effort will pay off ultimately.
Monthly income
It will be easy to manage your finances if you know your income and your expenditure monthly. So, subtracting your income from the savings gives you expenses.
Whatever additional earnings you get, make sure you add them into the monthly income. Keep track of where or what you spend money on.
To find out where the big part of the money goes, you need to compile the expenses into one area. After that, you should total each category. You can label the purchases if it’s a debt, a want, need, or savings.
Cash on hand
This helps a lot in times of emergencies. No matter your priority, you should also have some funds you can access easily.
Things happen unexpectedly in everyday life. Setting aside money for handling issues as they emerge will create a sense of security.
Savings plan
Aligning your priorities with your spending habits is the best financial plan. You will have to reduce expenses elsewhere.
Set up a savings account to help meet your financial goal. Practice this for one month to see if it will work.
Saving early
Saving early helps you to build interest. There’s no need of having an investment account to begin earning interest.
The reason being, the majority of the best savings produce interest. Additionally, this will apply to retirement. Your money will begin growing the most if you begin as soon as you can.
Setting your spending needs
Before you make a budget, it is best to know your priorities. Make sure you align your financial goals with money spending habits.
Your utmost priority is to spend money on things you need. As much as you can, make savings. For instance, you can save money for an emergency such as hospitalization.
By doing this, you’ll not run short of funds if you have the right financial resources allocation.
Nature of financial management
As stated earlier, the management of finances is an important feature of any business. The nature of financial management explains what financial management entails.
What is the importance of finances in a business?
- Finances are useful in purchasing physical business resources.
- They are useful in the production sector of a business.
- Pay wages to the employees of a firm.
- Are a source of payment to the suppliers and many other business functions.
There are different views on financial management. Some view it as the provision of funds that is necessary for a business considering its aims, with an intention to project a good amount of returns.
This approach is more concerned with the financial sources of this income. The sources of income may be financial institutions and instruments or another source to raise funds. With this lays a legal obligation of accountability between the firm and its financial source.
Another view is that financial management involves fund procurement and efficient use of the funds. This is a strategy of balance.
The financial management team ensures that the profit yielded ought to be adequate after catering for all the costs involved and any other risks projected by the business.
Raising capital for a business is not a major problem in a developed market. The major challenge is the effective use of capital by planning and controlling the finances effectively.
Scope of financial management
To get it right with financial management, one has to understand its scope. When making financial decisions, it is key that you take into account the interests of the stakeholders.
With this in mind, it is important to ensure the maximization of returns for the stakeholders.
This depends on the amount of capital investment, the business’s gains, and the total net worth. Evaluation of all this is vital for the growth and success of the corporation.
Making decisions of financial management
Most managers in companies try to procure finances with less cost to it and maximize its utility to make the most profit out of it.
Below are some of the major decisions to achieve this.
Decision to invest
From the whole amount available investment, firm managers need to establish what amount they should invest for a short term or a long term.
For decisions on short-term investments, it involves a short time financial commitment similar to current assets.
They involve investments in bank deposits, inventory, cash, etc. This investment has an impact on the output and liquidity of your business.
For decisions on long-term investments, it involves a long-term financial commitment, almost like a fixed asset.
Such are decisions you can’t reverse and involves land, constructions, machinery, and many others. Financial goal is a major determinant of such an investment in a business.
Decisions on financing
Company managers have to figure out how to source their capital. This decision can either be on the capital structure or the financial planning.
On the capital structure, it involves establishing sources of income. The decision may be inclusive of selecting external sources of funds such as bonds, banks, and shares.
On financial planning involves having a rough estimate of the financial needs of a company. Also, making sure the funds are available and adequate when needed.
Decisions on dividends
This decision involves the proceeds from a business in which the shareholders get a part of as dividend.
Shareholders always expect high returns from their shares while the business owner still requires having some profit left. Both sides have to feel satisfied at the end of it all.
Objectives of Financial management
- It aims at minimizing costs.
- Ensures that there is a regular stream of funds and that they are adequate.
- Involves organization, planning, directing, and controlling finances.
- To make sure that the shareholders’ proceeds are enough according to their capital investment, the market rates, and meeting their interests.
- It aims to ensure that the funds procured are well utilized to maximize profits.
- Aims to provide security for the finances invested so that it yields the expected proceeds.
- To establish a balance between equity capital and debt payment.
Functions of Financial Management
- Provides an estimate of the required capital
As a manager of finance, one has to estimate the capital needed for the company. This is dependent on the ordinary expenses, proceeds, and any future unforeseeable expenses.
- Establishing the sources of capital
After estimating the capital needed, the company management should figure out the major source of financing for the business.
This may be the corporation’s equity capital and maybe external sources to fill the capital’s remaining part.
In the case of external sources of funds, the company can have several options to choose from.
This depends on the pros and cons of each as well as the financing period. These options include;
- Selling of shares/ debentures.
- Loans from financial institutions like banks.
- Issuance of bonds.
- Fund investment
Investment of funds has to be in ventures that have high chances of making profits to secure your investment.
- Division of profits
This decision lies in the hands of the finance manager. Division of profit should be to the shareholders as dividend and another share retained by the business owner.
- Cash management
The financial manager has to oversee the proper utilization of the company’s funds.
They should ensure that expenses such as salaries, payment of bills, purchasing of resources, buying stock for the business, catering for any liabilities, and paying the suppliers as well as creditors are well accounted for.
- Proper control of finances
Controlling finances is one important factor in managing finances. This is possible through financial analysis, control of profits and general funds, and analyzing future financial situations.
Start your financial management journey now
A great way of building your financial security is taking control of where and how you are spending your income as life can take a turn for the worse unexpectedly.
The important thing is that you try getting back on budget and be successful in financial management.