Managing finance is important for a person, a family, a small business or a big business. Personal finance management is explained in my blog “How to manage your money?”.
Big businesses always have specialists for financial management which determines the success of business. They may have different managers for different functions inside the finance management. Some organizations have Chief Finance Officer (CFO) who works close to Chief Executive Officer (CEO) as a strategic business partner.
Small business may or may not have separate persons for finance management. Sometimes owner himself do, sometimes an accountant or finance executive is doing finance management. Some owners even not give much importance to finance management.
Accounting is not finance management even though there is a close relation between them. Accounting is actually gives support to financial management. Accounting gives necessary input into the financial management function.
Financial management is simply procurement of funds and using these funds to achieve business objective. In some detail it involves activities such as planning investment, funding the investment, monitoring expenses against budget and managing gains from the investment.
Thus finance management is much important to any organization whether it is small or big. It is the key to successful business operation. A proper administration in finance is required to run the business proper and successfully.
A business operation becomes success when a financial management is effective in doing the below mentioned tasks very well. The failure in these can make the business also to fail in its operation. Thus finance management is important as it performs the tasks given below:
Investment in fixed asset
Investment in fixed assets is an important decision a company should take. A good finance management is taking care not to over invest in fixed assets.
Purchase of fixed assets needs more money, which can cause a decrease in money for the operation of the company. But necessary purchase is important also.
Without the purchase of machines or such related things company cannot go ahead. Some times company also needs to replace its existing assets. This may be due to technological changes or damage of machines or to increase the production etc.
So the decision in fixed assets deals with purchase of new assets and also to replace the existing assets. Capital budgeting techniques can be used to analyze the profitability in purchasing or replacing decisions of assets.
Deciding the source of fund and capital structure
One of the main functions of finance manager is the procurement of funds. Arranging needed finance in correct time is important.
The source of fund is also an important factor. The source of fund must be chosen by considering different factors like cost of capital, risk, availability in time etc.
That is a proper capital structure which includes owner’s fund (equity shares), preference share, loans (debentures), profits from business (retained earnings) etc.
The ratio of the fund’s source is decided in such a way that the cost of capital will be the minimum.
Managing cash flow of the business
Managing cash flow is a factor that determines the success of the organization. If it fails the business operation will be in trouble.
Both cash inflow and cash outflow should be managed properly. You may get income regularly, but the payment may be monthly or yearly. Sometimes you need more money instantly to manage your business.
The cash flow should be managed in such a way that business requirements should meet in time with minimum cost to business. If full income from the business is further invested, then the payments may be in problem. If more funds remains as idle, your business will not grow or not give maximum profit.
So a better finance management in terms of cash flow is needed for successful business operation.
Managing working capital
Keeping a short-term working capital can ensure your business will always have the fund to run its day-to-day activities. So it is necessary to arrange sufficient short term working capital for the daily operation of the business.
Some companies required more short-term finance than other. So understanding correct funds required for short term working capital is important. Make sure to ensure to meet company’s immediate requirement of funds.
Taxes are that part a company cannot avoid. Timely payments of taxes are important to avoid different problems that can occur to the company from government side.
You can plan the taxes in such a way that the payment of taxes can be reduced. It should also to ensure that business all financial needs come in same time. So tax planning is important.
Choice of source of fund can also affect the tax that a company has to pay. So finance management should plan and decide different ways by which the tax payments can be reduced.
Some expenses cannot be controlled by finance management but some are controllable.
General and administrative expenses can be controlled by different ways. So a finance manager should look into different ways by which general and administrative expenses can be reduced. This reduction in expenses can make your business’s day to day operations more cost-effective way.
A strictly followed budget is effective in controlling expenses of this kind. Categories which cause more expense can be identified, unnecessary categories can be avoided and thus a cost-effective way can be identified for day-to-day operation of your budget.
Setting sales targets
In setting sales targets finance management is also have a role. The sales target must be set with the coordination of operation or sales department with finance department.
The finance manager must give information about sales revenues which can provide growth to the organization.
A target which doesn’t give sales revenues that cannot deliver growth to the organization is meaningless. In other side a big sales target in which fund cannot be identified for the production or services will also be a failure.
Setting price for products and services
Finance department will also have a crucial role in setting product or services prices. The price should be determined in such a way as to increase the gross profit from the sale of the product or services.
The cost of the product should be identified correctly and then the price for that product is determined by considering many other factors.
Here I mentioned number of tasks that a business finance management is involved to point out the importance of financial management for your business. So give importance to finance management activities in your business. Fully concentrate on increasing sales may not help you in growing your business.
It doesn’t matter who does it for a small business, the tasks mentioned above should done properly. Even though I mentioned different tasks here, proper execution of the task is possible with coordination of other functions also.
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