Go figure – Discover the world of Financial Management and get on top of the bottom line

Go figure – Discover the world of Financial Management and get on top of the bottom line

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

The bottom line – financial management is simply a process of how to apply general management principles to financial resources.

What exactly does financial management involve?

In this article you will be guided into the world of financial management and introduced to the various terms and concepts as well as its critical functions and impact on the business.   To ensure that you are up to speed on what financial management entails as a whole enrol now on BOTI’s course on  Accounting Fundamentals – how to construct an income statement, balance sheet and cash flow and read financial statements

Financial management is concerned with the financial resources of an enterprise and primarily involves:

  • Planning
  • Organising
  • Directing; and
  • Controlling

These tasks are carried out with respect to all financial activities of the business such as procurement and the appropriate utilisation of business funds.

Financial management is also concerned with the means to applying general management principles to the financial resources of the enterprise.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

Scope

Financial management also deals with Investment decisions which include investment in fixed assets (also referred to as capital budgeting).   Investment in current assets which is also a part of the scope of investment decisions is referred to as working capital decision making.

 

Financial decisions

When we refer to financial decisions, such primarily relate to the raising of finance from various sources.  These decisions relate to the funding source, financing period or term, costs of financing and the anticipated returns.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

Dividend decision

The financial manager makes decisions with regards to the net profit distribution of the company.  Net profits are generally divided into two separate categories as follows:

  • Dividends payable to shareholders and the rate at which such returns are awarded.

 

  • Retained profits which relates to the amount that needs to be finalised and which will depend upon any expansion and diversification plans that the company may be involved with.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

Objectives of financial management

Since financial management is generally concerned with the procurement, allocation and control of financial resources of the business its main objectives include:

  • Ensuring a regular and adequate supply of funds to the business.
  • Ensuring adequate returns to shareholders which will depend upon the earning capacity, share price and shareholder expectations.
  • Optimal utilisation of business funds in the sense that once funding has been obtained, to ensure optimal funds utilisation with minimal costs.
  • To ensure safety on investment, that is, funds should be invested in safe ventures so as to enable an adequate rate of return on investment (ROI).
  • To plan a sound capital structure. That is, there should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

 

Functions of Financial Management

  • Estimation of capital requirements

A financial manager is required to estimate a company’s capital requirements.  Such will ultimately depend upon expected costs and profits and future programmes and policies of the business.  Estimations should be adequately forecasted so as to increase the earning capacity of the business.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Determination of capital composition

Once estimations have been made, capital structure will need to be determined which involves short- term and long- term debt equity analysis. This will also depend upon the proportion of equity capital a company possesses and additional funds which may need to be raised from external sources.

 

  • Choosing sources of funding

In order to procure additional funding, a business faces numerous options that include but are not necessarily limited to:

  • Issuing shares and debentures
  • Securing loans from financial institutions (banks)
  • Raising bonds

The choice of funding sources will depend upon the merits and demerits of the available options as well as the finance terms and time factors involved in the deal and factors involved in financing over certain periods of time.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Investing business funds

The financial manager is responsible for the allocation of business funds into profitable ventures in an attempt to secure regular returns within a framework of a good return on investment (ROI).

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Disposal of surplus funding

Disposal of surplus funding is carried out in one of two ways:

  • Dividend declaration, which includes identifying the rate of dividends and other benefits such bonuses.
  • Retained profits, whereby volumes need to be determined and which will depend upon any expansion, innovational or diversification plans the business may wish to undertake.

 

  • Cash management

It is incumbent upon the financial manager of the business to make decisions involving cash management.

 

  • Despite the advent of modern technology often ‘cash is still king’

Despite the advent of modern technology often ‘cash is still king’ and is required for a number of different purposes such as the  payment of wages and salaries, payment of electricity and water accounts, payments to creditors, meeting liabilities, maintaining stock levels, the purchase of raw materials and so forth.

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Financial control

The financial manager not only needs to plan, procure and efficiently utilise the funds of the business but also needs to exercise control over business finances.   This can be achieved using a variety of techniques including ratio analysis, financial forecasting and cost and profit control.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

Financial Planning

  • Definition of Financial Planning

Financial Planning is the process of estimating the capital required, its composition and framing financial policies in relation to the procurement, investment and administration of the funds of the business.

 

Financial planning objectives

 

  • Determining capital requirements

Determining capital requirements will depend upon factors such as:

  • Cost of current and fixed assets
  • Promotional expenses
  • Long term planning.
  • Capital requirements should be examined in terms of both short and long term requirements.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Determining capital structure

The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required by the business. This includes decisions of debt- equity ratio- both short-term and long- term.

 

  • Framing financial policies with regards to cash control, lending, borrowing and the like

It is the duty of the financial manager to ensure that scarce financial resources are utilised in the most profitable and efficient manner in order to ensure maximum return on investment (ROI).

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • The importance of financial planning

Financial Planning is a process that entails the framing  of objectives, policies, procedures, programmes and budgets regarding the financial activities of a business which ensures effective and adequate financial and investment policies.

Maintaining adequate levels of funding

The importance of financial planning cannot be underestimated since it ensures that the business maintains adequate levels of funding and is also crucial to the following whereby financial planning:

  • Assists in maintaining a reasonable balance between the outflow and inflow of funds so as to maintain financial stability.

 

  • Promotes investor confidence.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Assists in the development of growth and expansion programmes that improve business sustainability.

 

  • Reduces uncertainty in respect of fluctuating trends and changes in the market.

 

  • Minimises uncertainty which can hinder potential business growth.

 

 

Understanding the functions of finance in more detail

  • The investment decision

One of the most important finance functions is to intelligently allocate capital to long term assets.  This function is also known as capital budgeting.  It is of significant importance that capital be allocated towards long term assets so as to obtain maximum yields in the future.   Investment decisions are evaluated in terms of:

  • Profitability projections of the new investment

 

  • Comparison of cut off rate against new investment and prevailing investments

Along with uncertainty comes the risk factor

The future nevertheless remains uncertain, hence, inherent challenges exist when calculating anticipated returns.  Along with uncertainty comes the risk factor which should also be taken into consideration.  This risk factor plays a very significant role in calculating the expected return of a prospective investment.  Hence, when evaluating investment proposals it is vital to take into consideration both expected return and inherent risk factors.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

The investment decision not only involves the allocation of capital to long term assets but also includes decisions that concern the utilisation of funds which are obtained by selling those assets which become less profitable and less productive.

 

  • Disposal of depreciated assets

It is often a wise decision to dispose of depreciated assets that no longer add value to the business and instead direct such funds towards securing other more lucrative assets.

Opportunity cost of capital should be calculated when dissolving such assets. The correct cut off rate is calculated by using the opportunity cost of the required rate of return (RRR).

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Financial decision

The financial decision is yet another important function that a financial manger must perform.  It is critical to make appropriate decisions around when, where and how a business show go about acquiring the necessary funding.

Correct equity to debt ratio should be maintained

Funds can be acquired through numerous ways and channels. Broadly speaking, a correct equity to debt ratio should be maintained.  This mix of equity capital and debt is known as a firm’s capital structure.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Market value of company shares increases shareholder wealth

Companies tend to benefit most when the market value of a company’s shares increases.   This is not only a sign of growth for the business but increases the wealth of shareholders in the business.

  • Use of debt poses greater risks, buy may increase returns on equity funds

On the other hand the use of debt affects the risk and return of a shareholder.   While the use of debt poses greater risks, it may increase returns on equity funds.

 

  • Other than equity and debt there are several other tools which are used in determining a firm’s capital structure

A sound financial structure is said to be one which aims to maximise shareholder returns with minimal risk.  In such a case the market value of the business will increase and hence an optimal capital structure achieved. Other than equity and debt there are several other tools which are used in determining a firm’s capital structure.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

  • Dividend decision

Earning profit or a positive return is a common aim amongst all businesses. Yet, the key function a financial manager performs in the sense of profitability involves whether to distribute all the profits of the business among shareholders, retain these profits or distribute part of the profits among shareholders and retain the rest.

  • Maximising market value

Hence, it is the financial manager’s responsibility to determine an appropriate dividend policy which maximises the market value of the company.

  • It is common practice to pay regular dividends with respect to business profitability

Therefore, an optimum dividend payout ratio is calculated. It is common practice to pay regular dividends with respect to business profitability.  Another method is the issue of bonus shares to existing shareholders.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

  • Liquidity decision

It is critical to maintain a liquidity position to avoid insolvency.   A company’s profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a trade-off between profitability and liquidity it is important to invest sufficient funds in current assets.

  • Current assets should be used when liquidity problems occur

Current assets should be valued and disposed of from time to time once they become non profitable. Currents assets should be used during times when liquidity problems occur and as a result of insolvency.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

Understanding the Capital Markets

The shares of a company are traded on the stock exchange and hence there is a continuous sale and purchase of securities.  As a consequence, an in-depth understanding of the Capital Markets is an important function of a financial manager.

When securities are traded on the stock market a tremendous amount of risk is involved

When securities are traded on the stock market a tremendous amount of risk is involved in the process which invariably means that a financial manager needs to understand and subsequently calculate the risk involved in the trading of shares and debentures.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

 

Many investors are opposed to the distribution of company profits among shareholders

It is at the financial manager’s discretion as to how the distribution of profits should be deal with and many investors are opposed to the distribution of company profits among shareholders since such dividends could instead be used to reinvest in the business itself in order to fuel and therefore enhance growth. The activities of a financial manager consequently have a direct impact on the operation of the business as this pertains to the Capital Markets at large.

 

BOTI will help you get on top of the bottom line in the world of financial management when you enrol on one of our financial management courses, accounting courses, financial accounting courses and finance courses.  BOTI offers business training programmes across South Africa.   Book your seat on an accounting course now!

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