The Fundamentals of Financial Management
The Fundamentals of Financial Management
Introduction
THE FUNDAMENTALS OF FINANCIAL MANAGEMENT
ROLE of Financial
Management
1. In the past,To secure funds needed by the business enterprise.
2. Present important developments have changed that. The recognition thath business and industry
must operate within highly competitive atmosphere necessited management to use it resources
economically and effciently. One source is financial.
Financial Management
- Is charged with important and significant tasks and responsibilities
The Financial executives An Overview
Members of the Financial Executives Institute have major financial responsibilities in their companies.
01
Chairman of the Finance
Committee of the board of Financial Executives have a wide range of
Directors responsibilities .His function and activities are in the
pursuit of company goals and objectives. Among
02 Vice President of
Finance
these is the concerted effort to achieve an
optimum financial scheme of things for the firm
to maximize the welfare price of shares
03
combined with their risk-aversion
Controller characteristics. This involves decision regarding
the optimum structure of assets and the style
financing which is the best available methods by
which capital is secured ,allocated and adjusted.
04 Chief Financial
Officer
Expanding Role of Financial
Management
The expanding role of the financial executive and his contributions to the success of many large corporations is
very evident. We shall not dwell at lenghth on the functions of the Vice President of Finance, trhe Chief Financial
Officer and the Treasurer .We will see them all as Financial executives.
The Controller
as a financial executive is applied to various accounting positions, the duties
of which vary from one company to another.
in Smaller firms -the controller is nothing more then a glorified senior book keeper
in Bigger firms -the controller is a key executive. In most firms, the controller is between two extremes. In
this book , he or she is the chief management accounting executive and as one of the financial executives
decides and recommends objectives, set goals and involves himself heavily with these goals.
• The function of top and financial management is manage a business which can achieve its
objectives within the exixting framework of the economy and the objective of the nation’s
economy.
The following statements express this :
• “The decisions made by business, when added together ,are crucial for making the economy
stable or unstable. The individual businessmean should do everything he can to make the
economy more stable ,consistent with his responsibility for economic efficiency and
expansion.”
• First of all, the businessman can improve the things he does.He can develop new products to
satisfy new demands, wants and needs .He may improve his production methods to cut costs
and bring more products.He can improve his selling techniques.
• For instance, he can plan his investment with more attention to prospects for the long range
growth of the economy. He can keep hi inventory down to the minimum level needed for
efficient operations and avoid speculation.
• Extreme inventory fluctuations have been a major factor in past economic instability. He can
Build up his financial strength during good timrd for recession times.
SCOP
E
OF
Financial
mangement
The following finance function in business make up the broad areas of
financial management :
01 financial Planning
Includes the preparation and transition of the short and long-term plans and programs of a business enterprise
into terms of the funds needed to consummate such plans and programs. It also determines the most desirable and
economical way to acquire funds and the control over the expenditure of such funds, and the appraisal of the
results of these expenditures. It includes:
A.Cash budgeting
A major responsibility of financial management is to maintain an adequate cash position to enable the business to
meet possible contingencies. This is composite reflection of all the operating budgets in terms of Cash Receipts and
Disbursements .Its main objective is to determine the remaining cash resources that will be available
during the period. This will help the company know if they can carry the program by obtaining additional
capital or invest its excess funds.
A.Cash budgeting
In the same manner ,the financial executive may able to foresee through cash budget if he will have
sufficient funds to repay its loan.
A profitable business, as indicated by its PROFIT or LOSS STATEMENT may be starved for cash and
may in fact be in danger of TECHNICAL INSOLVENCY OR TEMPORARY INSOLVENCY . A
state of technical insolvency exists when a business enterprise is unable to meet cash payments due on
contractual obligations. The lack of cash to meet payments of accounts payable, wages, taxes and depts
retirement will constitute technical insolvency although the business enterprise may have substantial and
adequate value of assets.
On the other hand, LEGAL INSOLVENCY exist when assets amount to less than its recorded
liabilities as brought by successive losses. This creates a deficiency in the owners equity account
and renders it incapable of supporting the business enterprise’s legal liabilities. The business
enterprise may be liquid and current with its bills, but it can be legally solvent may types of
financial institutions, legal insolvency forces the enterprise into immediate bankruptcy status.
b.Raising money
Raising cash may partake of two ways:
One is raising money directly from the owners. With partnerships, the partners have to
pool additional funds to meet the growing needs of the businesses. The limitation to this method of
financing is when the partners suffer from a dearth of financial resources and are unable to invest
additional funds. To get out of this predicament, credit facilities, principally banking institutions are
to be availed of. This may mean that partners have to pay interest for the use of money. With respect
to corporations, is the sale of shares of ownership interest in the form of common and
preferred stocks is one way of raising money for the business use. This is a common method of
financing. Like any other method, it suffers from the limitation in that the corporation cannot issue
additional shares of stocks in excess of the authorized capital unless permission is first obtained
from the State.
BORROWING
C. FUNDS
This can be in long-term or short-term. This method of financing shall be the subject of a
detailed discussion in the later part of this book.
The use of a lease has become an important method by which a corporation may
expand its sale of operations without acquiring title to the needed sate Both as means of
expansion of single corporation and as method of combining properties of two or more
companies for operating purposes, the lease plays a significant role in business finance.
The Short-term lease is used by small businesses for renting of offices stores and some
factories. A short-term lease may be inconvenient for the tenant since the rent is subject to
change upon renewal. Long-term leases cover the use of buildings, factories, real
estate, mining and others: Long-term leases generally include an option that permits the
lessee to purchase the leased property.
02 Cash MAnagement
Profit is the prime object of any business. Whether it is able to achieve this goal or not depends on a
number of important factors, one of which is the manner by -which the working capital is used.
Management of the money resources of a business covering cash and marketable securities - include
functions such as:
First, it will reduce the number of occasions where an executive who has grown up in the
company has a wealth of knowledge about the company's organization. He knows the
personalities, attitudes and idiosyncrasies of his associates. No executive brought in from outside
the company is as knowledgeable in this respect, although his past experience is very helpful and
important.
Second, an effective program will help to retain in the company those who appear to be most
likely to quality for higher responsibility. This means that the best will be available, when needed,
to fill top management positions.
Third, it will be a means of training all employees in the company so that they will be better
qualified to carry out their tasks
Qualities Desired of Financial Executives
Successful financial executives exhibit certain desirable qualities which they have developed to their great
advantage through a program of training and development. Among such qualities found to be most useful are :
D.Ability to Visualize
Successful people are those who are able to visualize things and have a foresight of events.
Sometimes, the so-called intuition helps, although some may think of this as steaming up their crystal
ball. Intuition exists in the most conventional of minds. It is a way of thinking one knows what he is
doing.
Qualities Desired of Financial Executives
Ability and Willingness to Absorb New
e. Ideas
No company should be an entrepreneurial or "one-man" company, where there is only one Now
of ideas - from the top down. An accepting attitude of top management, in this case the financial
executive, creates commitment from employees since it is their ideas that are being introduced