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Running Head: Financial Management Concepts
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Financial Management Concepts
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FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
ABSTRUCT
Finance is one of the key drivers of a firm’s activities, and a critical component to
understanding business in general. Financial Management: Concepts and Applications is
designed to help students with no prior knowledge grasp the applications and relevance of
finance. Author “Stephen Forester” he reveals the practical side of finance, rather than just its
theoretical concepts, and shows how finance intersects with many other areas of business.
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FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
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Introduction
Financial management in a business means planning and directing the use of the company’s
financial resources — the cash it generates through its operations and the capital obtained from
investors or lenders. Although a company may have an accounting staff or an outside accounting
firm to provide financial guidance, financial management is one of the most important aspects of
the business owner’s job.
Budgeting
One of the most important concepts of financial management is budgeting. Spending
money without a plan or without regard to your sales can lead to overspending, missed bill
payments and decreased profits. Create a master budget each year for your business that includes
income and expense projections, a cash flow statement, a balance sheet and a profit-and-loss
statement. Perform a budget variance analysis each month or quarter to determine if your budget
projections were accurate or if they need to be adjusted. Organization’s have to budget their
assets so as to balance their expenses with your income. Budgeting plays an important role in the
effective utilization of available resources in order to achieve over all objectives of
an organization. Budgeting provides a means of controlling income and expenditure of a
business. Budgeting is used to evaluate the policies and goals of an organization. Moreover, such
policies and goals are tested with the help of budgetary control. It helps the management to
understand and co-ordinate various functional activities.
FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
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Reporting
To make the most effective decisions regarding marketing, distribution strategies,
pricing, hiring and other aspects of your business, you’ll need accurate information regarding
how each decision you make might affect your bottom line. Accurate and regular financial
reporting helps you know exactly where you stand financially, how different areas of your
company and different initiatives are performing and what your resources are. A balance
sheet lets you see your company’s assets and liabilities at any time. Cash flow reports tell
you if you can pay your bills on time or if your collections process is inefficient. Knowing
your available credit and what your interest costs are provide important information about
your purchasing power and profit margins. Increase communication. Improves productivity,
accuracy and timeliness Improves decision-making and efficiency within organization.
Cash Management
A goal of the cash management function is to make certain the business enterprise always
has the resources it needs to meet its financial obligations on time. A cash deficit compared to
what the owner forecast can cause serious harm to the company’s image and operations. For
example, the company may not be able to fill an important order because it cannot pay for the
raw materials needed to make the products. Managing accounts receivable and accounts payable
is part of effective cash management. The business owner wants to make certain he is collecting
all the funds due the company — the accounts receivable — as quickly as he can. Conversely, he
seeks to stretch out the time he takes to pay bills from outside vendors. In doing so, he doesn’t
want the company to get a reputation for paying so slowly that his suppliers insist on strict terms
such as payment upon delivery.
FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
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Planning and Forecasting
The financial management aspect of planning involves accurately forecasting the
company’s revenues, expenses and resulting net profit. The business owner uses the forecast -sometimes called a budget — as a tool to manage the company. Significant negative variances to
forecast indicate that the business environment and his company’s performance in the
marketplace were not what he assumed they would be when he created his annual plan.
Analyzing these variances focuses his attention on changes he needs to make to his strategies or
operations to get the organization back on course to reaching its goals.
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Capital Structure
Startup companies often need to obtain outside capital from wealthy individuals or
venture capital firms in order to fund the company until it reaches the breakeven point. As the
company grows, it may need additional infusions of capital to fund expansion. The financial
management function determines the best form of capital for the venture — debt, equity or a
combination — how much is required and when it is needed. Larger companies with stable cash
flow can borrow funds from financial institutions rather than having to give up an equity share to
investors in order to get the capital the company requires.
Tax Planning
Without proper planning, you will pay more taxes than you need to and risk fines,
penalties and liens. Effective tax planning can help you reduce payroll taxes, lower your income
tax liability, avoid paying sales taxes late and avoid surprises that arise when you are hit with tax
bills larger than you expected. Work with a tax expert to minimize your tax liabilities and meet
your obligations on time
FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
Debt Service
The more debt you carry, the more interest you pay, raising your overhead costs and lowering
your profits. Even if you have no problem paying your credit card bills or loan amounts, high
debt can lower your credit score, potentially decrease your ability to get more credit when you
need it, and raise the interest rates you’ll have to pay on future borrowing. Effective financial
planning includes monitoring your debt and managing it on a regular basis.
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FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
Conclusion
The risk /return tradeoff refers to an investor’s balancing the lowest possible risk and the
highest possible return in any investment decision. The concept of optimal portfolio holds that
Rational investors will make decisions which maximize returns at a given and comfortable level
of risk.
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FINANCIAL MANAGEMENT CONCEPTS AND THEIR APPLICATION IN ORGANISATIONS
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References
Management Study Guide: Financial Management – Meaning, Objectives and Functions
https://smallbusiness.chron.com/key-concepts-financial-management-60904.html
https://yourbusiness.azcentral.com/key-concepts-financial-management-23249.html
Sam Ashe of finance Using Financial Analysis to Evaluate Strategy
https://www.google.com/search?q=benefits+of+of+reporting+in+an+organisation&sourcei
d=chrome&ie=UTF-8
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