Financial management is important for various reasons such as: Helping organization in financial planning and acquisition of funds, efficient allocation and utilization of funds received. It ensures all staff contribute to the set objectives and operate within the budget guidelines. It also helps in making critical financial decision and improvement of profitability
By Nwokolo Charles Ike
Financial Management is the planning, organizing, implementing and controlling of financial resources of an organization. It is a managerial activity to organize and manage the financial activities of the business to achieve organization goals. The main goal of financial management is to help the organisation to organize its business to be profitable and maintain financial stability even in the most critical period. The Financial Manager plays a key role in financial management activities by helping to analyze the business short term and long term needs of the organization.
The objectives of financial Management include the following:
• To maintain enough supply of liquid funds for the organization.
• To ensure that the company achieve good returns on investments for the owners.
• To achieve optimum and efficient allocation and utilization of funds.
• To create viable and safe investment opportunities.
Application of financial management in business
The whole process of financial management involves planning and analyzing the short term and long term financial flows into and out of the business and it takes the following key steps:
Forecasting both short term and long term financial needs
Forecasting plays an important part in organization financial plan. Forecast may be made for Sales, Production, Selling & Distribution, and Administration etc. A short term forecast estimate Revenue, Costs and Expenses for a period of One (1) year. This may be expressed in form of Cash flow forecast which estimates Cash inflows and outflows in future period usually months, Quarter or One (1) year. The inflows and outflows of Cash recorded in Cash flow forecast are based on expected Sales Revenue and various Costs and Expenses to be incurred having regard to its past records or activities.
On the other hand, long term forecast is the one that estimates Revenue, Costs and expenses for longer term, say 5 or 10 years into the future. The long term forecast is very important for long term strategic plan and gives management idea of income possible with different strategic plans and in the preparation of organizations Annual Budget.
Developing Budget to meet the needs
This is a financial plan, prepared and approved by the management for a defined period, of policy to be pursued during the period for the purpose of achieving its set objectives. It is a statement of Income to be generated, Costs and Expenses to be incurred and employment of capital during the period. It is also based on the organization Financial Statement and the accuracy of the Financial Statement is very vital. There are usually several types of Budget established in organization financial plan.
They are: Cash Budget
This where a firm forecast short term Revenue, Costs and Expenses for a period not exceeding one(1) year. The Cash budget can be used to plan any Cash Shortage or Surplus during the budget period. It is very important because it guides the management in anticipating borrowing, repayment of obligations, meeting operating expenses and short term investment of idle funds.
Capital Expenditure Budget
This is where a company plans for major Asset purchases that require large amount of money and such capital outlay is expected to generate a flow of future Cash benefits lasting more than One (1) year.
Capital Expenditures are very important to a company because they require sizable Cash outlay and have long lasting impact on the company performance. A Company Capital Expenditures affect profitability, future direction in terms of level of demands for product or services and market penetration.
Master Budget
This is a combination of all the budgets of the company, Cash and Capital Expenditures and forms the company projected operating activities for the period. This can be expressed in the form of budgeted Profit and Loss Account and Balance Sheet.
Establishing financial Control to ensure achievement of objectives
Once all the forecasts have been prepared and agreed with respect to profitability, sufficiency of working capital, a plan may be prepared to cover all the financial operations as to Salaries, Rent, Administration, Supplies, and Advertising etc. Budgetary control relates to the use of Budget as a control devices whereby predetermined Plans, Standards, Output, Income and Expenditure are compared with actual result so that if necessary corrective action may be taken before it is late.
Periodically, a firm compares its actual Revenue, Costs and Expenses with Budget to see how far and well the organization is doing and if deviation from budget is revealed, reasons for deviation are sorted out.
The effectiveness of budgetary control system depends on the ability of the management to ensure that appropriate remedial action is taken when departures are revealed. The feedback process helps reveal which areas of Revenue, Costs and Expenses centers are varying from Standards.
Why is Financial Management Important?
Financial management is important for various reasons such as: Helping organization in financial planning and acquisition of funds, efficient allocation and utilization of funds received. It ensures all staff contribute to the set objectives and operate within the budget guidelines. It also helps in making critical financial decision and improvement of profitability.
•Nwokolo Charles is a Consultant and can be reached at cinwokolo@gmail.com,08030599774.
