NEWS AFFAIRS 7 : WHERE EVERY STORY HAS IT'S AFFAIR!
Financial management services are all about handling a company’s money in the best way possible.
It involves decisions making about how to use money to ensure sustainable profit goals .
In simpler terms :
Purpose: The main goal is to maximize the company’s value for its owners or shareholders. This means making sure the company is making more money than it spends and using its resources wisely.
Responsibilities: Financial managers handle tasks like budgeting (planning how to spend money), managing cash flow (keeping track of money coming in and going out), and securing funding (getting loans or investments).
- They ensure the company’s financial resources are used efficiently, both in the short-term and long-term.
Role: Financial managers, who report to top executives like the financial director, focus on these tasks. They help guide the company’s financial strategy and make sure it aligns with overall business goals.
In short, financial management is like making sure your household budget works efficiently, but on a bigger scale for a business.
Financial Management Roles
Here’s explanation of Financial Management Role in simple language:
1. Short-Term Management which involve tasks like managing everyday money needs, paying bills and handling cash flow.
- It also includes managing risks related to currency changes and product cycles, often using tools like hedging.
2. Long-Term Management which deals with bigger financial decisions, such as:
- Capital Structure means deciding how to mix different sources of funds (like loans and investments) to support the company’s growth.
- Capital Budgeting means Planning how to allocate money between different projects or business units.
- Dividend Policy: Deciding how much profit should be shared with shareholders versus reinvested in the business.
3. Specific Tasks:
- Profit Maximization: Achieving the highest possible profit where the cost of producing one more unit (marginal cost) equals the revenue earned from that unit (marginal revenue).
- Cash Flow Management: Ensuring there’s enough cash available to cover daily expenses like raw materials, wages, and rent. This is crucial for the company’s survival.
- Capital Cost Minimization: Reducing the cost of obtaining funds to increase profits.
- Estimating Fund Needs: Predicting how much money will be needed in the short term and long term to improve efficiency in raising funds.
- Determining Capital Structure: Deciding the right mix of debt (loans) and equity (investments) to finance the company’s operations and growth.
In essence, financial management ensures that a company handles its money effectively both in the short term and long term, balancing day-to-day needs with strategic planning for future growth.
Relationship with other areas of finance
Managerial Finance: It is about managing a company’s finance using financial tools and techniques.
- It overlaps with financial management by focusing on practical ways to handle money.
Corporate Finance: This deals with big financial decisions and long-term planning for companies, like how to raise and spend money.
- Financial management in areas like budgeting and funding overlap with it.
Investment Management: This is about managing investments such as stocks and bonds.
- It ties into financial management through managing short-term investments and cash needs.
Treasury Management: This part of financial management focuses on handling a company’s cash and financial needs day-to-day.
Personal Finance is about managing an individual’s personal finances, like budgeting, saving, and investing.
A personal financial planner helps individuals create financial plans to manage their money effectively.
In summary, financial management is connected to broader finance areas like managerial finance, corporate finance, and investment management, while also distinguishing itself from personal finance, which focuses on individual money management.
Example
Certainly! Here’s a table to illustrate the financial management example for the coffee shop, “Coffee Day Light.”
Budget Overview
| Category | Details | Amount ($) |
|---|---|---|
| Revenue | ||
| Daily Sales | 500 | |
| Monthly Revenue | 15,000 | |
| Expenses | ||
| Fixed Costs | ||
| Rent | 2,000 | |
| Utilities | 300 | |
| Insurance | 150 | |
| Total Fixed Costs | 2,450 | |
| Variable Costs | ||
| Coffee Beans | 1,000 | |
| Milk & Other Supplies | 500 | |
| Wages | 1,200 | |
| Total Expenses | ||
| Total Variable Costs | 2,700 | |
| Total Expenses | (Fixed Costs + Variable Costs) | 5,150 |
| Net Profit | (Monthly Revenue – Total Expenses) | 9,850 |
Cash Flow Monitoring
| Category | Amount ($) |
|---|---|
| Monthly Revenue | 15,000 |
| Total Expenses | 5,150 |
| Net Cash Flow | 9,850 |
Analysis Example
| Issue | Impact | Action |
|---|---|---|
| Increase in Coffee Bean Prices | Decrease in Profit Margin | Adjust prices or find cost-saving measures |
| Decline in Sales | Potential decrease in Revenue | Increase marketing efforts or offer promotions |
Growth Planning
| Investment | Estimated Cost ( $ ) |
|---|---|
| New Espresso Machine | 3,000 |
| Marketing Campaign | 1,500 |
The table above outlines the budget and financial management for “Coffee Day light.”
The coffee shop’s monthly revenue is $15,000, with total expenses of $5,150, resulting in a net profit of $9,850. Monitoring cash flow and planning for growth can help ensure the business remains profitable and can handle any financial changes effectively.
