Financial management refers to the coordination of a business’s accounting and finance activities.
Accounting: management tool used to record financial transactions to provide a summary of the business’s financial position.
Finance: coordination of how a business funds (pays for) its activities
Key elements include:
- Financial planning
- Financial control
- Financial decision making
Business: an organization or economic system where goods and services are exchanged for one another of for money.
Reasons for why people start businesses:
- Be your own boss
- Have control over enjoyment
- Economic goals
- Business goals
- But the number 1 objective is always financial
Therefore, very decision made within a business has either a positive or negative effect on its financial viability.
Businesses have short term and long-term goals.
Businesses strategically manage finance to achieve financial goals as well as business goals. Financial objectives include:
Management needs to ensure that enough funding is available at the right time to meet the needs of the business e.g. short term, funding may be needed to invest in equipment and stock and pay employees.
Long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions in order to grow the business and achieve market share
Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as”
- Are assets being used efficiently?
- Are the businesses assess secure?
- Do management act in the best interest of shareholders and in accordance with business rules?
The financial transactions are summarized into financial statements. The main ones are:
- Cash flow statement
- Income statement
- Balance sheet
The key aspects of financial decision-making relate to investment, financing and dividends:
- Investments must be financed in some way – however, there are always financing alternatives that can be considered. For e.g. it is possible to raise finance from selling new shares, borrowing from banks, or taking credit from suppliers
- A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends/ If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.
Financial statement are used to:
- Monitor the business’s money
- Make good choices about how to allocate finances
- Help a business decide where their money should be spent
- Identify if there is any extra money that can be used somewhere more appropriate
- Match back to financial objectives (SPEGL)
- Cash flow statement: money that is used day to day, needed to pay bills
- Income statement money coming in and money going out, how money is spent, best place to cut costs
- Balance sheet: tracking assets and liabilities, making sure that the business has enough money or assets to sell, to cover their liabilities (the money they own)
- Cash sales
- Receipts from trade customers
- Sale of spare assets
- Investment of share capital
- Personal funds invested
- Receipt of bank loan
- Government grants
- Receipts from factoring
- Payment of wages and salaries
- Payment of suppliers (e.g. raw materials, stocks)
- Buying equipment
- Interest on a bank loan or overdraft
- Payment of dividends
- Repayment of loans
- Payment of leasing of hire purchase rentals
- Income tax, VAT, and corporation tax